FOMC Eyeing Inflation, ‘Strike a Balance’ with Rate Hikes
Fed Chairman Jerome Powell, pledging to “strike a balance” between the risk of an overheating economy and the need to keep growth on track, told US lawmakers Tuesday that the central bank would stick with gradual interest rate increases despite the added stimulus of tax cuts and government spending.
Fed policymakers (FOMC) anticipate three rate increases this year, and Chairman Powell gave no indication in prepared remarks to the House Financial Services Committee that the pace needs to quicken even as the “tailwinds” of government stimulus and a stronger world economy propel the US recovery.
“The Federal Open Market Committee (FOMC) will continue to strike a balance between avoiding an overheating economy and bringing … price inflation to 2 percent on a sustained basis,” Powell said in his first monetary policy testimony to Congress as Fed chief.
“Some of the headwinds the US economy faced in previous years have turned into tailwinds,” Powell said, noting recent fiscal policy shifts and the global economic recovery. Still, “inflation remains below our 2% longer-run objective. In the (FOMC’s) view, further gradual rate increases in the federal funds rate will best promote attainment of both of our objectives.”
The testimony sent Chairman Powell’s 1st signal as Fed Chief that the massive tax overhaul and government spending plan launched by the Trump administration will not prompt any immediate shift to a faster pace of rate increases. “Gradual” has been the operative word since the Fed began raising rates under Chairman Powell’s predecessor, Janet Yellen, in late Y 2015.
The Fed is expected to approve its 1st rate increase of Y 2018 at the next FOMC meeting in March, when it will also provide fresh economic projections and Chairman Powell will hold his 1st press conference.
The fed is normalizing, not tightening.
The surprises, if any, are going to be after more data comes out near term, and accounts for things like the tax cuts and whether business investment spending continues higher.
Market reaction was muted. US stocks were trading slightly lower on the news.
.DXY was stronger Vs a basket of currencies.
Prices of US Treasuries were mixed.
US Treasuries ended lower Yield Check 2-yr +3 bpts at 2.26% 5-yr +6 bpts at 2.67% 10-yr +5 bpts at 2.91% 30-yr +1 bpt at 3.17%