MNI POLICY:Fed's Powell: Gradual Hikes Balance Inflation Risks

By Jean Yung

     WASHINGTON (MNI) - Chair Jay Powell said Tuesday the Federal Reserve needs

to continue gradually raising interest rates to balance both upside and downside

price risks at a time when unemployment is sub-4% and yet inflation remains

puzzlingly tame.

     Economic growth is forecast to stay above its longer-run level while

unemployment is expected to drop to 3.5% from the current 3.9%, already below

economists' estimate of its natural rate. Yet inflation is not seen rising much

above 2%, Powell said in a speech.

     But rather than concluding that the Phillips Curve relationship between

tight labor markets and higher inflation is broken, Powell argued that "many

factors, including better conduct of monetary policy over the past few decades,

have greatly reduced, but not eliminated, the effects that tight labor markets

have on inflation."

     He credits the Fed's recognition of the importance of anchoring inflation

expectations at 2% for "breaking inflation's momentum" when economic conditions

change, but acknowledged that economists may not fully understand why the

Phillips Curve has evolved the way it did over the past decades.

     The Fed takes seriously the two-sided risk that inflation could rise faster

than it has and also that inflation expectations could drift lower, as it had

appeared to do for the past five years until this summer.

     "Removing accommodation too quickly could needlessly foreshorten the

expansion. Moving too slowly could risk rising inflation and inflation

expectations," Powell said in a speech prepared for a Boston economists

conference.

     "Our path of gradually removing accommodation, while closely monitoring the

economy, is designed to balance these risks."

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

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