Trial now

Pullback Considered Corrective


Holding Above Recent Lows


BLOCK, Large 3Y Midcurve Put Condor

Repeats Story Initially Transmitted at 22:20 GMT Mar 21/18:20 EST Mar 21
--Fiscal Policies Expected to Lift Growth, But Inflation Still Lags
--Powell Hopeful But Noncommittal on Boost to Productivity
By Jean Yung
     WASHINGTON (MNI) - Jay Powell, in his first press conference Wednesday as
Federal Reserve chair, emphasized policymakers' confidence that fiscal policy
and other factors will lift the economy over time, driving higher growth and
interest rates. 
     But the Federal Open Market Committee's reluctance to embrace a four-hike
baseline projection for 2018 suggests that a number of policymakers are waiting
for more signs of growth and inflation in the data before committing to a more
hawkish policy stance. 
     Over the medium term, policymakers added a hike in 2019 and projected the
fed funds rate would rise to 3.4% by end-2020, a sharp rise from the December
estimate and half a percentage point above the Committee's longer run estimate
of 2.9%.
     "Several factors are supporting the outlook," Powell said. "Fiscal policy
has become more stimulative, ongoing job gains are boosting incomes and
confidence, foreign growth is on a firm trajectory. And overall financial
conditions remain accommodative." 
     However, inflation has yet to catch up. The core personal consumption
expenditure price index, viewed by the Fed as a key indicator of future
inflation, rose 1.5% year/year in January, short of the 2% target. Some of that
reflects one-off factors that will soon drop out of calculations, as the Fed has
repeatedly emphasized, and the FOMC forecasts it to rise to 1.9% by year-end and
to 2.1% beginning next year. 
     "On one hand the risk would be that we wait too long, and then we have to
raise rates quickly, and that foreshortens the expansion," Powell said. "On the
other side, if we raise rates too quickly, inflation then doesn't get
sustainably up to 2%, and that will hurt us going forward. We need that and we
need to make sure that inflation expectations are anchored at 2%." 
     "There is no sense in the data that we are on the cusp of an acceleration
of inflation," Powell added. 
     Despite the dramatic fall in the unemployment rate since the financial
crisis, "you have only seen very gradual upward pressures on inflation and
wages," Powell said. 
     "That suggests that the relationship between changes in slack and inflation
is not so tight. It is diminished but it's still there." 
     The FOMC is "very alert" to an acceleration of inflation, both in wages and
in prices, as the jobless rate sinks below the sustainable rate of unemployment
for a sustained period, "but it's not something we observe at the present,"
Powell said. 
     Since both productivity and inflation have remained near historically low
levels, "these low wage increases do make sense," Powell said. But the very
modest increase in wages has "surprised" him and others. 
     In light of that puzzle, the Fed is aiming to "take the middle ground
here," he said. 
     Asked whether stimulative fiscal policy would boost potential output via
productivity, and thereby driving growth and interest rates higher, Powell was
     Three years out, the FOMC is forecasting a "modestly restrictive" policy
rate, but the trend is "highly uncertain," Powell emphasized. 
     "Is it possible that the neutral rate of interest would move up because of,
for example, greater fiscal expansion?" Powell said. "There are reasons that
that might be the case. In fact, it did tick up a tenth." 
     However, given the historical context of much higher rates, "the committee
sees the neutral rate of interest as still quite low and is not seeing it as
having moved up," he said. 
     That's not to say it won't. Officials are "open to the possibility that it
will," he said. The Republican tax bill contain incentives for additional
investment, Powell noted, through allowing certain expensing of such expenses
and that "should encourage productivity." 
     Lower tax rates should also encourage more people to enter the labor force,
he added. 
     Ramping up productivity is not something within the Fed's control, but "we
are certainly hopeful that there will be supply side effects like that from the
tax bill," he said. 
     Meanwhile, talk over trade tensions stoked by new tariffs out of the Trump
administration and the potential to affect economic activity and inflation for
now represents "a risk to the outlook," Powell said. 
     "There is no thought, I think, that changes in trade policy should have any
effect on the current outlook," though business contacts report it as a concern
going forward, he said. 
--MNI Washington Bureau; +1 202-371-2121; email: