Highlights
“Great shape” is how Jerome Powell describes the state of the U.S. economy, stressing strong growth in the jobs market over the last couple of years. In reaction to this, Powell says the Fed, after years of accommodation, is now gradually normalizing policy in an effort to head off the risk of wage-driven inflation.
Powell is warning that inflation, due to high oil prices, may run over its 2 percent symmetric target during the summer, but only briefly. He said policy makers would only be concerned if inflation were to persistently run either above or below target, which he does not expect. On the risk of wage inflation, he does cite reports of labor shortages but notes that there has yet, in what he concedes is a mystery, to be much reaction in wages. And Powell also pointed to the positives of low unemployment, including how it may pull workers at the margin into the labor force.
On Washington policies, he said lower tax rates and fiscal stimulus will likely have a “significant” positive impact on demand. On tariffs, he acknowledged reports that they may be holding down business investment and hiring but he emphasized that such effects have yet to appear in the economic numbers.
On questions over the neutral rate, that is when the funds target neither holds back nor stimulates the economy, Powell acknowledges that it may be reached “relatively soon”. He stressed the importance of the gradual path for rate hikes which he said has been the “right thing” for the economy. Note that based on the latest FOMC forecasts, the neutral rate will be hit after four more 25-basis-point hikes.
Asked about credit risks in the economy, the chair said leverage among non-banks in the corporate sector is high but that defaults are low and that interest rates are still low. He stressed that debt among households, where credit stress was high in the 2008 collapse, is not a problem. On the flattening underway in the yield curve, he attributed the rise in short rates to the rise underway in the funds target and the relative stability of long rates to demand for safety. There were no questions on the unwinding of the Fed’s balance sheet which, for mortgage-backed securities, is noticeably behind schedule.
In a special note, the chair announced that beginning next year, in an effort to enhance transparency and the flexibility of policy, press conferences will be scheduled at each FOMC, formerly ever other FOMC.
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