Fed emphasizes ‘solid’ U.S economic growth, repeats gradual approach

By Lindsay Dunsmuir and Howard Schneider

WASHINGTON (Reuters) – U.S. economic growth has been solid during the first half of the year and the Federal Reserve continues to expect to raise interest rates gradually, the central bank said on Friday in an upbeat semi-annual report to Congress.

It is the Fed’s second submission to lawmakers since Chairman Jerome Powell took the helm of the Fed in early February. He is scheduled to answer questions on it before lawmakers on Tuesday and Wednesday.

Details of the 63-page report were consistent with the Fed’s current outlook detailed at its policy meetings, which is that strong economic growth and low unemployment require rate rises but that a lack of severe inflation pressures means they can remain gradual.

“Over the first half of this year, overall economic activity appears to have expanded at a solid pace,” the Fed said in its report, adding that the economy continues to be supported by favorable consumer and business sentiment, past increases in household wealth, solid economic growth abroad, and accommodative domestic financial conditions.

As such the Fed “expects that further gradual increases” in interest rates would be appropriate as it strives to continue to nurture an economic expansion that is now the second-longest on record.

The Fed said that the Trump administration’s package of tax cuts had likely contributed to a rebound in consumer spending from a sluggish start to the year and will likely provide a moderate boost to economic growth this year.

The relatively rosy picture of the U.S. economy was also referenced by Powell in an interview on Thursday in which he said he believes the U.S. economy remains in a “really good place” with recent government tax and spending programs set to boost gross domestic product for perhaps three years.

The Fed has raised interest rates seven times since it began a tightening cycle back in December 2015 and last lifted its benchmark lending rate by a quarter percentage point in mid June. The Fed sees another two rate hikes by year end.

Elsewhere in the report, policymakers once again flagged that wage growth has been weaker than they would have expected given the current unemployment rate of 4 percent.

Wage gains have been “moderate,” the report said, likely held down by weak productivity and it flagged the possibility that there could still be some further slack in the labor market, with more prime-age workers entering the workforce “if labor demand remains strong.”

Although it did not weigh in heavily, the central bank made reference to the Trump administration’s protectionist trade policies, saying the uncertainty was a concern to financial markets.

A number of policymakers have expressed worry trade disputes with key allies and China could slow business investment and Powell said on Thursday that sustained high tariffs on products and services could hurt the economy.

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