Fed chairman’s bullish outlook causes rumbles in stock market
WASHINGTON — New Fed Chair Jerome Powell delivered a message Tuesday that wasn't quite what Wall Street had expected: The U.S. economy is doing well, maybe even better than he thought late last year.
Powell emphasized in his first congressional testimony that the central bank plans to raise rates gradually. Nonetheless, his growing optimism about the economy rattled investors. Treasury yields climbed and stocks fell amid fresh speculation that the Fed would accelerate the pace of hikes in its benchmark policy rate this year. The Dow Jones industrial average closed down 299 points.
The Fed raised rates three times in 2017 and had projected in December that it would raise rates another three times this year. But many private economists said they now expected the Fed will boost rates four times this year rather than three.
“My personal outlook for the economy has strengthened since December,” Powell said when asked whether the Fed might boost its projection for rate hikes from three to four when it updates its outlook next month.
Powell would not say whether the Fed's projection for rate hikes would change. But he noted a number of ways that the economic outlook has improved since December, including stronger data on growth and inflation, the passage of a $1.5 trillion tax cut in late December and an increase in government spending in a January budget deal.
Powell said that he would not speculate on whether the number of hikes would be boosted since any change will depend on the individual forecasts of each of the 15 members of the Fed's policy committee.
But private economists said they saw Powell's comments as a strong signal that the Fed will be raising its rate forecast at its next meeting in March.
Powell's comments came as he delivered the Fed's semiannual monetary report to the House Financial Committee. He will appear Thursday before the Senate Banking Committee.
His reception before the House panel stood in marked contrast to how the committee interacted with Janet Yellen. Republicans often challenged Yellen, a Democrat, during exchanges in which she was often interrupted by male lawmakers who dismissed her answers on a wide variety of topics.
A frequent flashpoint was Yellen's objection to GOP-sponsored legislation to limit the Fed's independence by requiring the Fed to follow a specific monetary rule in setting interest-rate policies.
Powell, a Republican chosen by President Donald Trump in November when the president decided against giving Yellen a second term, expressed support in his opening statement for using various monetary formulas to help guide setting interest rates.
During a hearing that lasted more than three hours, Powell enjoyed a far more placid exchange with the GOP-controlled committee. A number of Democrats, however, sought to force Powell to criticize a range of Trump economic policies, from tax cuts the Democrats claimed would worsen income inequality, to huge budget deficits that are expected to make deficits climb toward $1 trillion annually.
Powell, however, was adept at staying out of political controversies, frequently saying that the subjects he was being asked about were in the realm of policies controlled by Congress and the administration and not the Federal Reserve.
In his statement, Powell praised Yellen for the important contributions she made during her four years as the first woman to lead the Fed. He said the two had worked together to ensure “a smooth leadership transition and provide for continuity in monetary policy.”