Steady rate hikes protect U.S. recovery: Fed chief

by Ben Pena August 27, 2018, 5:33
Steady rate hikes protect U.S. recovery: Fed chief

While his remarks will be pored over for a clue about the bank's policy plans, they will attract more interest after Donald Trump's criticism this week of its recent interest rate hikes and accusations it is not backing his economic agenda.

Inflation, meanwhile, is near the Fed's 2 percent target range.

In recent months, some emerging market economies with high borrowing costs in dollars have suffered as a outcome, including Turkey, where the lira has plunged in value, sparking an economic crisis.

The Fed has raised its key policy rate seven times since late 2015 after seven years of keeping the rate at a record low near zero to help the economy recovery from the Great Recession. "The unemployment rate has declined steadily for nearly nine years and, at 3.9 percent, is now near a 20-year low".

USA central bankers are raising interest rates gradually to keep inflation in check while at the same time giving the almost decade-long expansion room to run.

Strong economic growth, strong earnings and low interest rates have combined to continue to move the USA equity market higher, said Leo Grohowski, chief investment officer for BNY Mellon Wealth Management.

Markets are pricing in two more rate hikes this year, and one next year, less than the three rate hikes the Fed now forecasts for 2019. "If the strong growth in income and jobs continues, further gradual increases ... will likely be appropriate".

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The Turkish Lira has lost almost 40 percent of its value against the USA dollar since the start of the year. Its leader lives in Pennsylvania and the USA has rejected calls from Turkey to have him extradited.

Increasing consensus at the Federal Reserve on the need to continue raising USA interest rates was on display at the start of a global central bankers meeting here, as the longstanding distinction between so-called policy hawks, centrists and doves blurs in the face of falling unemployment.

Other policymakers present in Jackson Hole this week have flagged what they see as the risks from Trump's trade policies, which have led to tit-for-tat tariffs with China, the European Union, Canada and others.

Powell also admitted the economy has changed, making it "difficult to detect and measure in real time", which is why a "diversity of views" at the Fed is crucial for establishing policies.

Where Powell stands on the pace of interest rate hikes will be scrutinised after minutes from the Fed's most recent policy meeting indicated the central bank would tighten monetary policy soon. The Fed is widely expected to resume doing so at its next policy meeting late next month. While unemployment is below the committee's longer-run estimate of a rate that corresponds with non-inflationary use of labor resources, "there does not seem to be an elevated risk of overheating".

Some economists believe the Fed is moving too slowly given the low unemployment in the USA, which could increase the bargaining power of workers to demand higher wages, stoking inflation. Real time estimates of the natural rate of unemployment were now too high, so a mechanistic approach to monetary policy would have recommended a much tighter stance in the 1990s.

"I am confident that the FOMC would absolutely "do whatever it takes" should inflation expectations drift materially up or down or should crisis again threaten", he said.

"I see the current path of gradually raising interest rates ... to taking seriously both of these risks", he said.

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