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Powell: Fed remains patient in setting rates

The labor market is strong, but recent inflation pressures have eased, and trade concerns remain

Summary

The Federal Reserve will remain patient in assessing the need for rate hikes this year, according to Fed Chairman Jerome Powell.

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The Federal Reserve will remain patient in assessing the need for rate hikes this year, according to its chairman.

In a Feb. 27 address to Congress, Fed Chairman Jerome Powell noted inflation pressures have become more toned down in January, while the job market remains strong. Further, financial conditions are “less supportive of growth” than they were last year. The Fed will continue to assess incoming data in determining the future course of monetary policy.

The Fed raised its federal funds rate by a quarter of a percentage point four times in 2018, driving card APRs to record highs. However, Powell last month indicated the Fed could take a more dovish approach to monetary policy this year, leading to speculation that consumers could get a break after three years of steady rate hikes.

Responding to a question about whether recent weakness in housing starts would impact the Fed’s decision making, Powell noted that the Fed “will be patient and watch” as the economy and risk changes, looking at a “full set of data,” which includes housing starts. The Fed is not looking at a higher inflation target, he stressed in response to another inquiry, and is focused on achieving its 2 percent target.

See related: Card balances ticked up by $1.7 billion in December, Fed says

Job market still strong, while inflation is held down

The Fed estimates that GDP for 2018 rose at less than 3 percent (economic growth for 2017 was at 2.5 percent). The job market remains strong, with more people encouraged to look for work, pushing up the labor force participation rate. Signs of stronger wage growth is another positive. However, there are still labor market disparities between rural and urban areas, and between ethnic groups.

Powell anticipates that recent declines in core inflation estimates, which exclude food and energy prices and tend to be a better indicator of future inflation, mean inflation will continue to be held down. This is based on the PCE (personal consumption expenditures) price inflation index for January, which is at an estimated 1.9 percent.

He also noted that fewer Americans in their prime working years are employed or looking for work, which means the labor force participation rate for this group is lower than in other developed countries. Moreover, productivity growth remains low, and stagnant wages remain an issue.

Further, he sees uncertainty around Brexit and trade issues. He also noted the federal government’s debt is “on an unsustainable path.”

Ultimately, the Fed will continue to watch incoming data in deciding on future interest rate policy. The Fed’s current target interest rate is in the 2.25 to 2.5 percent range.

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Published: February 27, 2019

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