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Fed Chair Sees Gradual Rate Hikes Amid Strong U.S. Growth Outlook

February 27, 2018, 2:58 PM UTC

Federal Reserve Chairman Jerome Powell said the central bank can continue gradually raising interest rates as the outlook for growth remains strong, and the recent bout of financial volatility shouldn’t weigh on the U.S. economy.

“Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” Powell said in written testimony to the House Financial Services Committee on Tuesday in Washington. “Fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory.’’

Powell takes charge of the rate-setting Federal Open Market Committee at a time when the world’s largest economy may be shifting gear to faster growth, somewhat higher inflation, and declining unemployment. Adding to the momentum are tax cuts and spending increases agreed to by Republican lawmakers and signed by President Donald Trump.

“In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis,’’ he said, in his first public appearance before Congress as Fed chief.

The recent correction in the stock market and rising rates on U.S. government debt shouldn’t hamper growth, he said.

“We do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and inflation,’’ Powell said. “Indeed, the economic outlook remains strong.’’

Powell repeated the FOMC’s January message, saying “further gradual increases’’ in the Fed’s policy rate “will best promote’’ the attainment of the central bank’s objectives of maximum employment and stable prices.

The central bank has been struggling with too low inflation. The personal consumption expenditures price index has been below the central bank’s 2 percent target for most of the past five years.

“We anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term,’’ Powell said.

He said the lag in wages during the expansion was due to low gains in output per hour, or productivity, though a new wave of investment spending “should support higher productivity growth in time.’’

“Wages should increase at a faster pace as well,’’ Powell said, adding that the FOMC continued to view the shortfall in inflation last year “as likely reflecting transitory influences that we do not expect will repeat.’’

The economy will expand at 2.7 percent rate this year, according to the median estimate in a Bloomberg survey, while headline inflation will rise to 1.9 percent.