MNI 5 THINGS: Fed's Powell Reiterates Positive Outlook

--5 Things We Learned From Chairman Powell's Interview

By Sara Haire

     WASHINGTON (MNI) - In a radio interview with Marketplace expected to

broadcast later tonight, Federal Reserve Chair Jerome Powell painted a

relatively favorable picture of the current economy and how he views the

outlook, not straying too far from what the minutes from the June meeting

revealed on July 5.

     Here are 5 things of note from his interview.

     - Chair Powell reinforced his previous point that while trade policy may be

the talk of the town, it is not one of their responsibilities delegated by

Congress. However, he said that the Fed has reported that they have been

"hearing a rising level of concern about the effects of changes in trade

policy." He also said that this process is a "new one" and that it is "very

difficult to predict how it turns out and we'll just have to see," avoiding any

concrete indication as to whether this is is considered a risk to the outlook.

Powell hypothesized that there could be situations that would be challenging for

the Fed, "where inflation is going up and the economy is weakening." Despite

these possibilities, Powell said that right now they are "watching carefully and

hoping for a good result."

     - The Federal Reserve generally has autonomy over the path set for monetary

policy, but members within the Trump administration have encouraged the Fed to

keep rates low, something Chair Powell says he is "not concerned about." Powell

said that he and his colleagues are committed to "work in a strictly

nonpolitical way, based on detailed analysis, which we put on the record

transparently, and we don't take political considerations into account." Despite

speculation that there has been pressure from the White House on the Fed, Powell

said that there hasn't been anything said to him to give him concern about their

independence.

     - Despite Chair Powell making sure to distinguish that he "wouldn't want to

comment on fiscal policy," he did explain how the Fed views the effects stemming

from the fiscal policy stimulus. He said in the Fed's and his own view that the

tax cuts and the spending increases are "very likely" to support economic

activity in the U.S. for at "least the next few years," adding that there will

be support and demand for economic activity for "at least the next three years."

Additionally, he added that there could be higher investment and productivity,

but it is "relatively uncertain." While the near-term seems to be nothing but

positive, Powell indicated that the longer-term could be a bit more bleak. He

said that it is generally understood that the U.S. is "on an unsustainable

fiscal path."

     - The balance of raising rates at a pace that is able to keep the economy

expanding sustainably is a tough one that the Fed has been doing well so-far.

The core PCE price index reached 2% in May, finally breaking through to meet the

Fed's 2% objective, but Powell cautioned that the Fed is not "declaring victory

there," as they "want inflation to be symmetrically at around 2%" and not just

"reaching up and touching it once." Now that they are close to achieving their

dual mandate of price stability and maximum employment, the Fed is "returning

rates to a more normal level," Powell said.

     - One reason why there has been less concern about the labor market

overheating is that wage growth has remained a little sluggish. Even the Fed had

expected "wages to move up fairly significantly" as the unemployment rate has

reached its lowest point in 20 years, Powell said. Wages have moved up mildly,

but not as much as was expected which has left the Fed with a "bit of a puzzle."

Powell said that the muted wage growth is partly due to inflation and

productivity being so low as well, but given how "tight labor markets appear to

be," it remains a puzzle. Despite the labor market tightening, prices were not

responding, which stood in contrast to what the phillips curve model would

predict. However, Powell noted that they are now "starting to see" the

relationship firming again.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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