No sign US economy ‘overheating’: Fed Chair Powell

No sign US economy ‘overheating’: Fed Chair Powell

WASHINGTON-Agence France-Presse
No sign US economy ‘overheating’: Fed Chair Powell

The U.S. economy is showing no signs of overheating, so the job market can continue to tighten without generating troubling inflation, U.S. Central Bank chief Jerome Powell said on March 1.

After his comments highlighting the strengthening economy roiled financial markets on Feb. 27 amid concerns the Federal Reserve would raise interest rates at a faster pace, Powell made it clear that gradual rate hikes would allow the economy to continue to expand.

With its incremental moves in the benchmark lending rate, the Fed is trying to strike a balance between achieving full employment and not allowing the economy to overheat, Powell said in the second day of his semi-annual testimony to Congress.

But, he told the Senate Banking Committee, “There’s no evidence that the economy’s currently overheating.”

He repeated that the gradual path of rate increases that the Fed has been pursuing -- with three rate hikes last year -- “will continue to be the appropriate path as long as the economy performs this way.”  

In his testimony earlier this week, Powell presented a very bullish view, saying the economic outlook had strengthened since December, citing the growth boost from the recently enacted tax cuts as well as a stronger global economy.

Those comments sent stock prices sliding.

Economists already had viewed a rate increase at the late March Fed meeting as a virtual certainty, but investors and analysts now broadly expect four moves this year rather than three.

The Fed can at any time change the key interest rate that sets everything from mortgages to car loans, but in recent years it has only done so at one of the four policy meetings that includes a press conference by the Fed chief, like the one in March.

Powell noted that while the tax cuts are likely to “add meaningfully to growth” for the next couple years, there so far is no sign of accelerating pressure on prices due to rising wages.“So I would expect that some continued strengthening of the labor market can take place without causing inflation,” he said.

Like other Fed officials, Powell said he was surprised inflation and wage gains haven’t been more evident, as the economy recovered from the global recession and unemployment dropped to a 17-year low of 4.1 percent.

But tightening of monetary policy at the current pace will allow wages to continue to grow and allow the economy to continue to expand.“What we don’t want to have happen is get behind the curve,” he cautioned.

That could force faster rate increases which could trigger another recession, hurting the most vulnerable segments the most.