Fed may hike rates faster
WASHINGTON — Saying the U.S. economy has strengthened in recent weeks, new Federal Reserve Chairman Jerome H. Powell suggested Tuesday that the central bank could raise its key interest rate faster than anticipated.
Powell said he and his Fed colleagues will try to balance stronger growth with the potential for “an overheated economy” now that “fiscal policy is becoming more stimulative” with tax cuts and increased federal spending.
In his first extensive public comments since taking over as Fed chief at the start of the month, Powell told the House Financial Services Committee that “the economic outlook remains strong ” despite recent financial market volatility.
“At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market or inflation,” Powell said during his first congressional appearance since becoming Fed chief.
Even though the nineyear economic expansion is the second-longest in the nation’s history, Powell said he was not concerned a downturn is looming.
“There’s always a risk of a recession at any given point in time,” he said. “I don’t see it as at all high at the moment.”
Powell struck an upbeat but cautious tone in his initial remarks.
He did not indicate whether the Fed would accelerate its pace of interest rate increases, saying that the central bank’s policymaking Federal Open Market Committee still viewed “further gradual increases” in the benchmark federal funds rate as the way to “best promote attainment” of the dual objectives of stable prices and maximum employment.
Fed officials indicated in December they expected three small rate increases this year.
But pressed on developments since then — including implementation of the tax cuts and economic data showing higher wage growth and consumer prices — Powell acknowledged his views on the economy have improved.
Then he indicated the forecast for rate hikes this year might increase when the Federal Open Market Committee meets March 20 and 21.
“My personal outlook for the economy has strengthened since December,” Powell said. “I wouldn’t want to prejudge that new set of projections, but we’ll be taking into account everything that’s happened since December.”
His comments about 40 minutes into the hearing caused the yield on 10-year Treasury bonds to jump and major stock indexes to begin dropping as investors anticipated a fourth rate boost this year, which would be designed to slow growth to keep the economy from overheating.
Powell “certainly opened the door” to a fourth small rate increase this year, said Diane Swonk, chief economist at accounting and advisory firm Grant Thornton. She warned of a recession in late 2019 or 2020.
“I’m worried that we’re feeding a boom-bust cycle,” she said of the stimulus from tax cuts and spending increases at this stage of the economic expansion. “That means that things will get better before they get worse, but then things will get much worse.”
The yield on the 10-year Treasury increased in a matter of minutes Tuesday, from 2.86% to 2.92%, and stayed at about that level for the rest of the 3 1/2-hour hearing. It closed at 2.9%. Major U.S. stock indexes were down about 1.2% after being up slightly before the hearing.
“That did spook the market a little bit … seeing that we may have a slightly quicker trajectory in the interest-rate cycle,” said Myles Clouston, senior director at Nasdaq Advisory Services.