MNI POLICY: Fed's Powell Is Positive In Face Of Uncertainty

By Sara Haire

     WASHINGTON (MNI) - Federal Reserve Chairman Jay Powell drove home the point

that the economy is doing very well by most measures, with inflation hitting 2%

and continued strength in the labor market, and that while there may be

uncertainties stemming from trade or fiscal policy, risks to the outlook are

"roughly balanced", he said in his testimony before the Senate Banking Committee

on Tuesday.

     Despite a few uncertainties, he maintained that risks remain "roughly

balanced" and that the "FOMC believes that--for now--the best way forward is to

keep gradually raising the federal funds rate."

     Powell explained that the Federal Open Market Committee has "continued to

dial back the extra boost that was needed to help the economy," and that their

policies "reflect the strong performance of the economy and are intended to help

make sure that this trend continues."

     Inflation has finally hit the Fed's 2% objective and is expected to "stay

near 2% over the next several years," Powell said, adding that they will

"continue to keep a close eye on inflation."

     The advance estimate for second quarter GDP will not be released on July

27, but according to Powell, incoming economic data suggest that second quarter

growth will be "considerably stronger" than the first quarter. 

     This will likely bolster support for the expectation that the Fed will

continue on its trajectory for potentially two more rate hikes in 2018, as long

as data supports this.

     He noted in his remarks that "federal tax and spending policies likely will

continue to support the expansion" and later followed up in his Q&A saying that

the tax bill has had a positive impact on GDP growth. However, he did caution

that it is "difficult to predict...the size and timing of the economic effects

of the recent changes in fiscal policy."

--TRADE STILL UNCERTAIN

     In his answer to questions from Senators, Powell repeated his sentiment

that trade policy is "the business of congress." However, he admitted that there

are "long-run effects" that they, being the FOMC, should talk about.

     He also agreed that tariffs, when placed for prolonged periods are not good

for the economy and that "in general, countries that have remained open to trade

that haven't erected barriers... have grown faster...and countries that have

gone in a more protectionist direction have done worse."

     The Trump Administration has been attempting to renegotiate trade deals.

The U.S. recently proposed an additional $200B of tariffs on Chinese goods and

services, that will need to be reviewed before implementation.

     Powell explained that "we want to have an international rules-based system"

for trade policy that has accountability amongst the countries for the benefit

of all. He said that if the Administration is able to accomplish their goal of

lower tariffs for all trading partners, then "that would be very good for the

economy" but Powell added that "if we wind up with our tariffs, then not so

good."

--WAGES ARE UP

     Wages have been "growing a little faster than they did a few years ago,"

according to Powell's prepared remarks. He came under slight heat from Senators

challenging him by saying real and nominal earnings from nonsupervisory and

production workers still show only muted growth.

     However, Powell dismissed most of their qualms with the earnings growth,

saying that overall earnings have shown strength with the most recent year/year

rates recently moving up and that "wages have moved up meaningfully over the

last five years."

     However, wages have still not risen as fast as in the pre-crisis years, his

testimony acknowledged. But, he said that "moderate wage growth also tells us

that the job market is not causing high inflation," which indicates that there

is still more room to grow.

     He also said that wages not rising in tandem with the labor market

strengthening and inflation reaching 2% could be due to compositional effects of

more people coming into the labor force at lower paying jobs.

     Powell will testify before the House Financial Services Committee on

Wednesday starting at 10:00 a.m. ET.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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