The Federal Reserve chairman has insisted US policy is not on a “preset” path as he defended the central bank’s gradual interest rate increases amid political pressures and turbulent markets.
Jay Powell said rates are still low by historical standards, hovering “just below” estimates of neutral — the level that neither causes growth to accelerate or slow down. He stressed there is “no preset policy path” for rates ahead, and that the central bank will be watching new economic data very closely as it decides what to do next.
Mr Powell underlined that it may take more than a year for the economic effects of the Fed’s past rate rises to become apparent, in an argument for the central bank to tread carefully as it tightens further.
His comments at the Economic Club of New York on Wednesday come as the Fed is under intensifying pressure from the Trump administration to hold back from further rate rises. The president’s latest intervention came in an interview with the Washington Post, in which he said the Fed, which next month is expected to lift rates for a fourth time this year, “is way off base with what they’re doing”.
Mr Trump added: “So far, I’m not even a little bit happy with my selection of Jay.”
In his speech Mr Powell did not directly reference the president’s comments. But he noted that the Federal Open Market Committee had around three years ago judged that the economy was no longer “best served” by extraordinarily low interest rates.
“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth,” said Mr Powell. “My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 per cent.”
The Fed’s gradual pace of rate rises was an exercise in balancing two risks, Mr Powell said.
“Moving too fast would risk shortening the expansion,” he said. “We also know that moving too slowly — keeping interest rates too low for too long — could risk other distortions in the form of higher inflation or destabilising financial imbalances.”
Mr Powell’s speech came after the release of the Fed’s new Financial Stability Report. He said that overall indebtedness in the financial system was not “abnormal or excessive”. Even though some asset valuations were high, the Fed did not see “dangerous excesses” in the stock market.
The Fed chairman also offered a sanguine view of financial market risks, saying that while policymakers were keeping an eye on areas including rising corporate indebtedness, the overall system was resilient. The Fed’s latest financial health checks suggested there are a number of areas that officials needed to keep an eye on, “but all things considered you are in good health,” Mr Powell said.
The principle area for worry was corporate lending, where firms with high debts and interest burdens have been boosting their borrowing the most, and measures of loan underwriting quality have been deteriorating.
