Fed says gradual rate hikes to continue

Jerome Powell downplays trade skirmishes.

A solid U.S. economy and rising inflation will prod the Federal Reserve to keep raising interest rates gradually, Chairman Jerome Powell told Congress on Tuesday.

But he also acknowledged the widening negative effects of U.S. trade skirmishes with other countries.

“We’ve heard a rising chorus of concerns that speak to (spending plans) being put on hold” because of uncertainty about trade, Powell told the Senate banking committee in his semiannual report to Congress.

If that kind of fallout deepens and hurts economic growth, it could lead Fed policymakers to slow the pace of rate increases, economists say. In June, Fed policymakers forecast a total of four hikes this year, up from their estimate of three in March.

Powell, asked repeatedly about the trade conflicts, took pains to say it’s too early to predict the outcome of the standoffs, adding they haven’t affected the Fed’s plans to gradually bump up its benchmark short-term rate.

“I’m firmly committed to staying in our lane, and our lane is the economy,” Powell said. “The (Fed) believes that – for now – the best way forward is to gradually raise the federal funds rate.”

Last week, President Donald Trump took steps that could lead to $200 billion in tariffs on Chinese imports, adding to $34 billion in duties already imposed on Chinese goods and sweeping steel and aluminum tariffs. And he has threatened another $200 billion in tariffs on China. China, the European Union and Canada have threatened counter-tariffs. Many economists believe the escalating battles could no- ticeably ding economic growth and even trigger a recession by pushing up consumer prices, hurting U.S. exports and stoking business uncertainty.

If the trade spats ultimately lead to lower tariffs on U.S. exports, “that would be a good thing for the economy,” Powell said. But if they result in higher tariffs over the longer term, “that would be bad for our economy and other economies, too.” Generally, he said, “Countries that are more open to trade have grown faster. ... Countries that have gone in more of a protectionist direction have done worse.”

Sen. Heidi Heitkamp, D-N.D., told Powell her state’s farmers are being hurt both by higher steel prices and higher tariffs overseas that reduce their exports. “I am deeply concerned about the long-term ramifications of this socalled short-term policy,” she said.

Powell agreed the taxes would hurt economic growth if they “stay in place for a long period of time.”

Sen. Joe Donnelly, D-Ind., says the duties have already reduced exports and prices for Indiana corn and soybean farmers and are beginning to chip away at a farming base that took decades to build. “I think we know it would be very bad” if that continues, Powell said.

Committee members also pressed Powell on why average wage growth has not picked up more, particularly for lowand middle-income workers, in light of strong job gains and the low, 4 percent unemployment rate. Powell said wages are unlikely to increase faster over the longer term unless businesses achieve stronger growth in productivity, or output per worker.

Productivity, he conceded, could be hampered by the trade fights if they continue to discourage investment in labor-saving technology.