Fed Chairman Powell Backs Gradual Rate Hikes, Warns of Trade Uncertainty

Investing.com – Federal Reserve Chairman Jerome Powell reiterated on Tuesday that it was appropriate to follow the central bank’s plan to gradually increase interest rates, although he warned that uncertainty surrounding current trade tensions made analysis difficult.

“With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that — for now — the best way forward is to keep gradually raising the federal funds rate,” Powell said in his semiannual monetary policy report to Congress.

Powell indicated that he and his fellow policymakers at the Fed believed that the job market will remain strong and inflation will stay near its 2% target over the next several years.

He explained that financial conditions remained favorable to growth, that a stronger financial system was in a good position to meet the credit needs of households and businesses, tax and spending policies would likely continue to support the expansion and the outlook for economic growth abroad remains solid despite greater uncertainties in several parts of the world.

However, he admitted that “it is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy.”

“Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate,” he added.

In his conclusion, Powell remarked that the Fed’s decision to gradually increase rates was based on the idea that a faster or slower pace entailed risks.

“On the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective,” he explained.

Powell concluded that the Fed would continue to evaluate incoming data and respond with action depending on the economic outlook.

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