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

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