US Fed’s Powell defends policy of gradual interest rate hikes

JACKSON HOLE, WYOMING (Reuters): Federal Reserve Chairman Jerome Powell on Friday defended the US Central Bank’s push to raise interest rates as healthy for the economy and signalled more hikes were coming despite President Donald Trump’s criticism of higher borrowing costs.

The Fed, which began to tighten monetary policy in 2015, has raised rates twice this year and is widely expected to do so again next month and in December.

Speaking at a research symposium in Jackson Hole, Wyoming, Powell said he wanted to “explain today why my colleagues and I believe that this gradual process remains appropriate”. “The economy is strong. Inflation is near our 2% objective, and most people who want a job are finding one. If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”

Powell made no mention of Trump’s criticism of the Fed’s monetary policy. In an interview with Reuters on Monday, Trump said he was “not thrilled” with Powell’s Fed for raising rates and said the Central Bank should do more to help boost the economy.

In his speech, Powell simply made the case that gradual rate hikes are the best way to protect the US economic recovery and keep job growth as strong as possible and inflation under control.

Fed’s Kaplan sees three or four more rate hikes, then a pause

Reuters: With the US economy at full employment and inflation at the Federal Reserve’s 2% goal, the US Central Bank should press on with its plan for gradual interest rate hikes at least for the next nine to 12 months, a policymaker said on Tuesday.

Only once short-term rates reach a ‘neutral’ level where they are neither stimulating nor braking the economy should the Central Bank potentially stop raising rates and figure out what to do next, Dallas Fed President Robert Kaplan said in an essay.

Neutral, he said, is somewhere between 2.5% and 2.75%.

“It would take approximately three or four more federal funds rate increases of a quarter of a percent to get into the range of this estimated neutral level,” Kaplan wrote in the essay, which was published by the Dallas Fed.

“At that point, I would be inclined to step back and assess the outlook for the economy and look at a range of other factors - including the levels and shape of the Treasury yield curve - before deciding what further actions, if any, might be appropriate.”

US President Donald Trump told Reuters in an interview last week that he’s “not thrilled” with the interest rate hikes that have occurred under Fed Chairman Jerome Powell so far, and that the Fed should do more to help the economy.

Kaplan’s comments, though they did not directly address Trump’s remarks, underscore the Fed’s view that raising rates, as Kaplan put it, “will give us the best chance of managing against imbalances and further extending the current economic expansion in the US.”

Kaplan said he expects the US economy to grow 3% this year but to slow next year as the effects of tax cuts fade. The narrow gap between long-term and short-term Treasury yields shows investors see slower growth ahead, he said, and also suggest the US economy is in the late stages of an economic expansion that looks headed to be one of the longest in history.