MNI ANALYSIS: Fiscal Policy Poised to Push US Rates Higher

--Powell's Own Outlook 'Strengthened' Since December

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Chairman Jay Powell foreshadowed the

evolving consensus view of the Federal Open Market Committee on Tuesday, telling

Congress his own view of the economy has strengthened in the past couple months

and suggesting upgrades to the Fed outlook to come next month. 

     "My personal outlook for the economy has strengthened since December,"

Powell told members of the House Financial Services Committee in his first

public appearance as Fed chairman. 

     He would not "prejudge" any evolving view on the FOMC, as officials are due

to submit a new set of economic projections in three weeks, Powell said, but

"what we've seen is incoming data that suggests a strengthening in economy,

we've seen continuing strength in the labor market, we've seen some data that

will in my case add some confidence to my view that inflation is moving up to

target." 

     Add to that continued strength around the globe and fiscal policy becoming

"more stimulative" -- headwinds turned tailwinds, according to Powell -- and

that spells clear optimism for the near term and even cautious optimism further

out, as he then alluded to the possibility that a supply-side boost to the

economy could lift productivity and the long-run growth potential of the

economy.

     --BLESSING TRUMP POLICIES

     Powell's remarks contained echoes of his colleague Fed Gov. Randy Quarles'

speech just a day earlier. A fellow Trump administration appointee and old

colleagues from the private sector, Quarles delivered a substantive assessment

of economic conditions Monday, saying the combined tax and budget reforms will

impart a "considerable" demand impulse to the U.S. economy. 

     "There is a real possibility that some of the factors that have been

holding back growth in recent years could shift, moving the economy onto a

higher growth trajectory," he told an conference of economists in Washington.

"That said, I currently see this shift more as a clear possibility than an

unarguable reality."

     As Quarles did, Powell appeared to give Trumponomics a qualified blessing.

Lower corporate taxes should lead to higher investment, Powell said, though the

effect is difficult to estimate. In turn, higher investment should lead to

higher productivity, which would be "very welcome," he said.  

     He declined to comment in detail on how the Fed will adjust monetary policy

to account for a ballooning deficit, saying, "It's very hard to say in advance"

what the effect on the policy path may be. 

     Quarles also zeroed in on worker productivity as the most salient proxy for

upgrading the supply side of the economy to counter a rise on the demand side,

and therefore the best hope to minimize inflationary impacts from fiscal

stimulus.  

     --UPSIDE INFLATION RISK

     Where Quarles voiced some concern over inflationary consequences down the

road of unleashing a fiscal stimulus on an economy already operating with a

jobless rate of 4.1%, Powell declined to speculate on the specifics beyond

reiterating that the FOMC expects it to rise this year as transitory drags fade.

     "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% on a sustained basis," he said in

his opening remarks. 

     The monthly readings toward the end of the year are already "a little

higher" than in earlier months, he noted. Wages, which have risen moderately,

"should increase at a faster pace as well," he said. 

     While it is clear that risks to the inflation outlook are tilted toward the

upside, whether the fiscal stimulus will skew the risks further toward more

aggressive monetary policy remains open for debate. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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