MNI Fed Chair Powell Calls For Gradual Hikes; No March Hint

--Echoes FOMC's Statement, 'Further Gradual Increases' Appropriate

--Fiscal Policy More Stimulative, Positive for Growth

--Inflation to Rise This Year, Stabilize at 2% Over Medium Term

By Jean Yung

     WASHINGTON (MNI) - With some of the headwinds facing the U.S. economy

dissipating, Federal Reserve Chairman Jay Powell told Congress on Tuesday the

Fed plans to continue raising interest rates to sustain a strong labor market

and return inflation to its 2% target. 

     "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 percent on a sustained basis," he

said in opening remarks prepared for his semiannual report on monetary policy to

the House Financial Services Committee, his first as Fed chair. 

     Fiscal policy has "become more stimulative" and foreign demand for U.S.

exports is "on a firmer trajectory," he said. These two factors, added to a

robust job market and upbeat business sentiment, are set to support growth going

forward. 

     As expected, Powell strayed little from the conclusions drawn at the last

Federal Open Market Committee meeting in late January, judging near term risks

to the outlook as "roughly balanced" and repeating the FOMC's guidance that

"further gradual increases in the federal funds rate will best promote

attainment" of the Fed's dual mandate. 

     He gave no overt hint about any action at the FOMC's next meeting, set for

March 20-21. Markets overwhelmingly expect officials to nudge rates higher by

another quarter point, to a target range of 1.5% to 1.75%. It would be the first

of three rate increases policymakers penciled in at the start of the year. 

     The new Fed chair did reiterate Tuesday that the FOMC continues to view

some of the shortfall in inflation last year as "likely reflecting transitory

influences that we do not expect will repeat." 

     Though inflation "continued to run below" the Fed's 2% target, monthly

readings were "a little higher toward the end of the year" compared to earlier

months, he noted. Core PCE inflation was 1.5% in December, below its level a

year earlier. 

     A tighter labor market will see wages increasing "at a faster pace" after

growing "moderately" in the last six months, he said, highlighting a "modest

acceleration" in some wage measures. 

     The weak pace of productivity growth in recent years has dampened some of

that momentum in wage growth, but there may be a silver lining: A sharp uptick

in business investment last year "should support high productivity growth in

time," Powell said.   

     Acknowledging "recent volatility" in financial markets, Powell noted that

financial conditions remain accommodative even after reversing some of the

"substantial easing" that took place last year. "At this point, we do not see

these developments as weighing heavily on the outlook for economic activity, the

labor market, and inflation," he said.  

     Finally, Powell reiterated to Congress that the FOMC routinely consults

monetary policy formulas, noting that he personally finds them helpful but that

using them requires "careful judgments." Depending on the variables used as

inputs and the particular formula selected, the rules prescribed a fed funds

rate ranging from 0% to 3.0% in the final quarter of 2017, according to the Fed.

     He will take questions from the House committee at 10:00 ET. 

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

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