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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
[TOPICS: MMUFE$,M$U$$$]
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