Several years of ‘strong’ jobs, low inflation still ahead: Powell

Fed will continue to raise rates gradually

NEW YORK, July 17, (Agencies): US Federal Reserve Chairman Jerome Powell, discounting the risk that a trade war may throw a global recovery off track, said the economy is on the cusp of “several years” where the job market remains strong and inflation stays around the Fed’s 2 percent target.

“He added some language that the risk was roughly balanced, that the economy might be worse than expected or better than expected, for now. It was a little bit of a hedge from Powell.

“He had seemed a little bit more hawkish than that. He’s giving (the Fed) a little wiggle room that maybe they won’t raise rates for a fourth time this year.” They’re waiting to see what happens.

There are things going on with fiscal policy that are stimulative. Tax rates should be stimulative. But there’s the other side of the coin: maybe there’s a slowdown globally. There’s some trade rhetoric we’re seeing.”

“The testimony is largely in line with what we expected — If (the Fed) doesn’t tighten as much, the yield curve flattening may slow down from here. We expect the curve to stay relatively flat, but I think we’ve seen the bulk of flattening for the year.”

“I suspect the market was pricing itself for a potential hawkish surprise, which it didn’t get. But I mean when you parse the comments there’s nothing dovish in there.

Far from it.

The conditions are still solid. He’s pretty upbeat on the outlook. The global picture is solid. Financial conditions are very accommodative. He rattled off a long list of reasons why you should expect solid growth.”

“Powell has been very transparent with markets. He picked up where Yellen left off. Right now with the Fed’s gradual rate increases, he will continue with that approach. He wants to normalize interest rates because they have been so low for so long. The Fed wants to keep its powder dry before the next economic downturn.

The Fed has been open to four rate increases in 2018. That’s still on the table with the economic data we have seen. With the trade tariffs and the flattening of the yield curve, they could slow down the rate normalization process. The market is pricing the next rate hike in September and it’s about 50 percent for another hike in December so it could go either way.

“We have been very defensive with duration. We have stayed neutral to shorter than our benchmarks because we are in a rising rate environment. We see more value in the short-end of the curve.”

“There’s not really anything in his opening comments to materially move rates here. Powell continues to point to gradual rate hikes, he does seem fairly upbeat on the economic situation. It does seem as though, at least in the prepared remarks, that risks are broadly balanced and there isn’t a whole lot of mention of trade. So I think, net net, (there’s) not really much here to change the outlook.”

“He slipped in ‘maintaining the appropriate monetary policy.’ The $64,000 question is what do they consider to be the appropriate monetary policy?

That is the conundrum here. If you look at the last set of dot plots we got at the last FOMC meeting and interpreted them literally, my sense is, it implying two more quarter-point hikes this year which would take the funds rate up to 2.5 percent, four more next year which would take the funds rate up to 3.5 percent and then two more in 2020 which would take the funds rate up to 4 percent.

My best guess, knowing what I think I know about the economy, is that if the funds rate is at 4 percent two years from now the Fed has probably done too much and that increases the potential risk of pushing the economy into recession perhaps in the 2021 period.”

Meanwhile, the Federal Reserve will continue to raise rates gradually as the economic outlook remains strong despite uncertainty over trade policy, Fed Chairman Jerome Powell said Tuesday.

Powell was upbeat about the US economy, noting that job creation remained strong and inflation was right around the Fed’s two percent target.

In addition the recent tax cut, strong business investment is fueling consumer spending and business investment remains strong, he said in his semi-annual testimony to the Senate Finance Committee.

However, he acknowledged that it was “difficult to predict the ultimate outcome of current discussions over trade policy,” a clear reference to the aggressive tariff policies adopted by President Donald Trump against China and many US trading partners.

The International Monetary Fund warned Monday escalating trade tensions and tariff threats, if carried out, could disrupt global growth and derail investments.

Still, Powell said the Fed’s interest rate-setting Federal Open Market Committee was satisfied with the central bank’s efforts to get monetary policy back to normal by raising rates and reducing the size of investments accumulated in the wake of the 2008 financial crisis.