Economy close to goals: Fed

THE U.S. IS IN A ‘REALLY GOOD PLACE’

WASHINGTON • The Federal Reserve Board underscored its commitment to a gradual pace of interest-rate hikes in its semi-annual monetary policy report to Congress, which also addressed topics ranging from monetary policy rules to labour force participation.

The Federal Open Market Committee “expects that further gradual increases in the target range for the federal funds rate will be consistent with a sustained expansion of economic activity, strong labour market conditions, and inflation near the committee’s symmetric 2 per cent objective over the medium term,” the Fed said in its Monetary Policy Report to Congress released in Washington on Friday.

The Fed has raised rates twice so far in 2018 and has pencilled in another two hikes this year as it balances the risks of raising rates too slowly — resulting in too high inflation and asset bubbles — or going too quickly and throwing the economy into a recession.

Chairman Jerome Powell, who’ll present the report when he appears before Congress next week, said the U.S. economy was in a “really good place” in an interview with American Public Media’s Marketplace program on Thursday, while cautioning that higher trade tariffs could pose a risk to growth.

The Fed Board report noted the jump in oil prices over the past year, but added that there should be “much less” of a net overall drag on the economy as investment and production in the U.S. energy sector rise. The report said the rise in oil prices since last year translates into a roughly US$300 increase in annual expenditures on gasoline for the average household, from about US$2,100 to US$2,400.

Inflation has crept up slowly, with the Fed’s preferred measure, minus food and energy prices, touching the Fed’s 2 per cent target in the 12 months through May.

The Fed characterized overall risks to financial stability as low, saying the nation’s biggest banks were “strongly capitalized and would be able to lend to households and businesses even during a severe global recession.”

For businesses and households together, the ratio of debt to the size of the economy was “about in line with estimates of its trend, although pockets of stress are evident,” the report said. In particular, the Fed noted that delinquency rates for some forms of consumer credit had risen, “suggesting rising strains among riskier borrowers even with unemployment very low.”

The report said vulnerabilities associated with leverage in the financial sector appear low, however, “some measures of hedge fund leverage have increased.”

The report also said risks to stability from outside the U.S. were “moderate overall.”

“Globally, potential downside risks to international financial markets and financial stability include political uncertainty, an intensification of trade tensions, and challenges posed by rising interest rates,” the report stated.

U.S. unemployment dipped to 3.8 per cent in May, matching its lowest level since 1969, before ticking up to 4 per cent in June. The Fed report included a short study on labour force participation rate, or LFPR, saying that the rate for prime age workers between 25 and 54 years old has moved up “notably and consistently” since 2013.