Fed sees U.S. econ­omy in sweet spot

Na­tion is grow­ing but not over­heat­ing, cen­tral bank says in report to Con­gress.

Los Angeles Times - - BUSINESS BEAT - By Heather Long

The U.S. econ­omy is in a sweet spot where it’s grow­ing but not over­heat­ing, the Fed­eral Re­serve said Fri­day in its lat­est of­fi­cial report to Con­gress.

Growth is solid, un­em­ploy­ment is low and price in­creases are mod­est, the Fed said. The only real notes of cau­tion in the 63-page report were sharply ris­ing oil prices and the es­ca­lat­ing trade war, but the Fed said it sees lit­tle sign that ei­ther of those fac­tors is likely to de­rail the econ­omy.

The Fed said re­peat­edly in the report that it plans to raise in­ter­est rates at a “grad­ual” pace. Some econ­o­mists and Wall Street traders fear that in­fla­tion will rise rapidly from Pres­i­dent Trump’s re­cent tax cuts and his bur­geon­ing trade war, forc­ing the Fed to in­crease in­ter­est rates quickly to coun­ter­bal­ance it. In­fla­tion hit a six-year high in June of 2.9%, ac­cord­ing to gov­ern­ment data re­leased this week.

But the Fed said that in­fla­tion is only a “lit­tle above” its 2% target and that mem­bers of the com­mit­tee that sets in­ter­est rates want to see a “sus­tained re­turn to 2% in­fla­tion” af­ter years of un­der­shoot­ing the target.

“I think the econ­omy’s in a re­ally good place,” Fed Chair­man Jerome Pow­ell said in an in­ter­view Thurs­day with Na­tional Pub­lic Ra­dio. “I wouldn’t say we’ve fully achieved [the in­fla­tion target] yet. We’re not declar­ing vic­tory there.”

Pow­ell will tes­tify be­fore Con­gress next week, giv­ing law­mak­ers a chance to push him more on his views of in­fla­tion, growth and wages, which are still grow­ing slug­gishly. Av­er­age hourly earn­ings grew 2.7% in the last year, mean­ing in­fla­tion is eat­ing up all the av­er­age Amer­i­can’s pay in­crease.

The higher in­fla­tion read­ing this week was pri­mar­ily driven by a surge in gaso­line prices, which have jumped more than 24% in the last year. The Fed typ­i­cally mon­i­tors in­fla­tion by strip­ping out gas and food costs, which tend to be highly volatile. Ex­clud­ing food and fuel, in­fla­tion was up 2.3% in the last year, the La­bor De­part­ment re­ported this week.

A sud­den jump in oil prices in the 1970s caused in­fla­tion to climb rapidly and prompted the Fed to hike in­ter­est rates to the high double dig­its, a sce­nario that pinched many small busi­nesses and home­own­ers. But the Fed doesn’t an­tic­i­pate that hap­pen­ing now.

“Higher oil prices now im­ply much less of a net over­all drag on the econ­omy than they did in the past,” the Fed wrote in the report, not­ing the United States is pro­duc­ing more oil at home and thus ben­e­fit­ing from ris­ing prices. “The neg­a­tive ef­fect of up­ward moves in oil prices should get smaller still as U.S. oil pro­duc­tion grows and net oil im­ports de­cline fur­ther.”

The report made lit­tle men­tion of trade other than to say that many of the Fed’s pol­i­cy­mak­ers cited “trade pol­icy as pos­ing down­side risks to growth fore­casts.” Pow­ell has been care­ful not to opine on is­sues such as trade and tax pol­icy that he be­lieves are bet­ter left to Con­gress and the White House.

“I think this [trade] process that is go­ing on now is a new one. It’s very dif­fi­cult to pre­dict how it turns out and we’ll just have to see,” Pow­ell said in the NPR in­ter­view.

Most econ­o­mists and mar­ket strate­gists think Pow­ell won’t de­vi­ate from the slow and steady pace of rate hikes the Fed has laid out for the rest of 2018 and 2019.

“I see no rea­son for the Fed to move off the cur­rent path they have laid out of rais­ing rates grad­u­ally. They don’t want to sur­prise the mar­ket,” said Bryan Besecker, a mar­ket strate­gist at BNY Mel­lon. “Pow­ell’s goal is not to sur­prise the mar­ket.”

Carolyn Kaster As­so­ci­ated Press

THE FED plans to raise rates at a “grad­ual” pace. Fed chief Jerome Pow­ell has been care­ful not to opine on is­sues such as trade and tax pol­icy.

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