MNI POLICY: Fed Chair Powell Urges Gradual Hikes; Near Neutral

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Chair Jerome Powell reiterated Wednesday

that gradual tightening remains the best approach as interest rates enter

neutral territory and the U.S. economy continues to perform above potential.  

     In a highly-anticipated speech, Powell gave no hint that the Fed was

reevaluating its outlook for policy or considering an imminent pause in planned

rate increases. He also did not respond to overnight criticism from President

Donald Trump blaming stock market declines and factory closures on rate hikes. 

     "We know that moving too fast would risk shortening the expansion. We also

know that moving too slowly -- keeping interest rates too low for too long --

could risk other distortions in the form of higher inflation or destabilizing

financial imbalances," he told the Economic Club of New York. "Our path of

gradual increases has been designed to balance these two risks, both of which we

must take seriously." 

     He highlighted both the uncertainty of the economic outlook and the effects

of interest rate increases, saying the latter "may take a year or more to be

fully realized." 

     Rates "remain just below the broad range of estimates of the level that

would be neutral for the economy," and the FOMC will be "paying very close

attention to what incoming economic and financial data are telling us" in

formulating next steps, he said. 

     --OPTIMISTIC OUTLOOK

     There is "a great deal to like" about the current economic outlook, Powell

said, adding he isn't worried about recent stock market volatility. 

     The labor market is at or near its historic best, with the jobless rate at

3.7%, a 49-year low. Inflation is "near our 2 percent target," and GDP growth of

3% is "well above most estimates of its longer-run trend." Analysts forecast

continued solid growth, low unemployment, and inflation near 2%. 

     Equity market prices are "broadly consistent with historical benchmarks"

and recent declines do not threaten financial stability. Valuations in some

asset classes "seem high relative to history," but "today we do not see

dangerous excesses in the stock market," Powell said. 

     --STABILITY RISKS MODERATE

     Powell listed among sources of risk that might trigger distress in the

financial system the unsettled state of trade relations, Brexit negotiations,

budget discussions between Italy and the European Union, and cyber-related

disruptions, and concluded that financial stability risks stemming from shocks

are moderate overall. 

     The Fed and other regulators have been working with U.S. financial

institutions that have operations in the European Union or the United Kingdom to

"prepare for the full range of possible outcomes" to the Brexit negotiations, he

said. 

     Stress tests show that U.S. banks have the capital to weather even highly

disruptive events, he said. 

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

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