MNI 5 THINGS: Fed's Powell: Strong Case For Gradual Rate Hikes

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

By Sara Haire

     WASHINGTON (MNI) - Federal Reserve Bank Chairman Jerome Powell spoke

Wednesday at the ECB Forum on Central Banking. Here are 5 things of note from

the speech.

     - Powell maintained that "the case for continued gradual increases in the

federal funds rate is strong." Powell started off the same way he did at his

June 13 press conference following the Fed's decision to raise interest rates,

by emphasizing that economy is "performing very well." He highlighted a

"particularly robust" labor market, inflation moving closer to the Fed's 2%

objective, and growth above long-term trend estimates. However, he did note that

growth trends are not as strong as they would like and that inflation has not

yet been sustained at the Fed's 2% objective. In the Q&A portion, Powell said

that monetary policy remains accommodative and "will continue to try very hard

to carry out our mandate and avoid surprises as possible." He did, however,

caution that the Fed may offer less forward guidance as it shifts toward press

conference after every meeting in 2019.

     - During the Q&A portion on the topic of effects from trade policy and

tariffs, Powell briefly touched on the topic where he noted that if "principal

changes" were made to trade policy, this could spur the Fed to question their

outlook. Powell has been careful to avoid discussing trade policy, stressing

that it is outside the realm of the Fed's control, but could shape their

outlook. However, Powell in his speech retained that risks "appear roughly

balanced." The tailwinds currently outweigh the potential headwinds, Powell

cited economic growth, likely to be boosted by the fiscal stimulus in the next

few years.

     - Powell addressed the notion of sustainability as the unemployment rate

continues to drop to levels not seen since the 1960. He explained that the

changes in history may mean the comparison may not be able to 'shed as much

light" on the sustainability of a low unemployment rate. He explained that a lot

has changed in the last 50 years, including continued "low and stable"

inflation, a greater number of people with higher education, and that the

estimates for the natural rate in the 1960s were considerably higher than

estimates today.

     - Since there is no history to reflect on, Powell stressed how natural rate

of unemployment estimates remain uncertain, and are even more so now that

inflation has becomes even less responsive to the unemployment rate. "The

anchoring of inflation expectation has likely played a role in the flattening of

the Phillips curve," Powell said, and continued on to give part credit for the

well-anchored inflation expectations to central banks for keeping inflation

"under control." He added that some longer-term inflation expectations have

"edged lower" in recent years. In responding to questions, Powell underlined the

importance in making sure there is effective communication, and the removal of

the forward guidance language as the U.S. moves to normal policy environment

allows for that.

     - While strong economic conditions are inherently good, Powell noted that

confidence can quickly turn into overconfidence, and the last two recessions

have been caused by "financial imbalances, not high inflation." Despite the

economy ramping up, Powell views "U.S. financial stability vulnerabilities as

moderate," and despite some high asset prices, does not see "broad signs of

excessive borrowing or leverage."

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

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