Fed’s Powell hints at road ahead for rate hikes

Federal Reserve Chairman Jerome Powell signalled Friday that he expects the Fed to continue gradually raising interest rates if the U.S. economic expansion remains strong.

The Fed leader forecast that while annual inflation has risen to near the Fed’s 2% target rate, it doesn’t seem likely to accelerate above that point. That suggests he doesn’t foresee a need for the Fed to step up its rate hikes. Late next month, the Fed is widely expected to resume raising rates.

Read: Fed minutes suggest further rate hikes coming ‘soon’

Speaking to an annual conference of central bankers in Jackson Hole, Wyoming, Powell said the Fed recognizes that it needs to strike a careful balance between its mandates of maximizing employment and keeping price increases stable. He said a gradual approach is the best way for the Fed to navigate between the risks of raising rates too fast and “needlessly shortening the expansion” and moving too slowly and risking an overheated economy.

Powell began his speech by pointing to the growing strength of the U.S. economy, with the unemployment rate declining steadily for almost nine years and reaching a near 20-year low at 3.9%.

“There is good reason to expect that this strong performance will continue,” he said.

But the U.S. also faces challenges, which “are mostly beyond the reach of monetary policy,” he said. Those include slow growth in real wages for medium- and low-income workers and the country’s “unsustainable” federal budget deficit, Powell said.

Powell made no mention of the recent public criticism from President Donald Trump, who has said he’s unhappy with the Fed’s rate hikes. The president has complained that the Fed’s tightening of credit could threaten the continued strong growth he aims to achieve through the tax cuts enacted late last year, a pullback of regulations and a rewriting of trade deals to better serve the U.S.

Many have seen Trump’s complaints about the Fed’s rate hikes as an intrusion on the central bank’s longstanding independence from political influence. Two top Fed officials made clear Thursday that Trump’s criticism won’t affect their decisions on whether to continue raising rates.

Read: Fed keeps key rate unchanged while signalling future hikes

Powell also made no mention in his speech of what many economists see as the most serious threat to the economy: the trade war that Trump has launched with America’s main trading partners—a conflict that risks depressing U.S. and global economic growth the longer it goes on.

The Fed chairman focused his remarks, in part, on the difficulty the Fed faces in setting interest-rate policies at a time when the economy seems to be undergoing changes that challenge long-standing beliefs of how low unemployment can fall before it ignites inflation pressures. He said there is also much uncertainty over the “neutral” rate of inflation—the point at which the Fed’s policy rate is neither stimulating economic growth or holding it back.

The Fed’s economic projections, compiled from estimates of all Fed officials, estimates the current neutral rate at 2.9%. But Powell noted that there’s a wide difference of opinion about it.

After having kept its key policy rate near zero for seven years to help lift the economy out of the Great Recession, the Fed has raised rates seven times, most recently in March and June this year. Most Fed watchers foresee two more hikes this year, next month and then in December.

The Fed is on a “one-hike-per-quarter path this year” but may take it slower in 2019, said Avery Shenfeld, managing director, economics, at CIBC World Markets, in Friday commentary. This could occur “as rates get closer to where the Fed might see the neutral rate lying,” he wrote.

Read: How trade tariffs could affect U.S. inflation, Fed

In the meantime, Powell’s comments show the central bank will remain dependent on data as it hikes, said Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, in his commentary. The Fed believes this “is the right course of action,” he wrote, adding, “A big part of the reason is that he/they have low confidence in estimates of the long run policy guideposts.”

Overall, Holt said Powell’s speech highlighted “the steady hand” and “stewardship” he’s providing in the face of uncertainty.