By Nick Timiraos 

DALLAS -- Federal Reserve Chairman Jerome Powell said the central bank was closely monitoring a modest deceleration in global growth, whose strength last year had provided an important tailwind for the U.S. economy.

"This year has seen a gradual chipping away at that picture. You've seen a bit of a slowdown -- not a terrible slowdown," Mr. Powell said Wednesday evening. "You still see solid growth, but you see growing signs of a bit of a slowdown. And it is concerning."

The global growth outlook was one of a number of challenges Mr. Powell flagged. While he didn't say that any of them were strong or surprising enough right now to change the Fed's current policy path of gradually lifting rates, the emphasis was notable because such risks haven't figured as prominently in Mr. Powell's other public comments since he became chairman in February.

One risk is that U.S. economic growth could slow in coming years as recent fiscal stimulus from tax cuts and spending increases wears off, Mr. Powell said during a moderated discussion at the Dallas Fed with the reserve bank's president, Robert Kaplan.

A separate challenge is that U.S. growth continues to outpace the rest of the world, putting strains on some emerging-market economies that face headwinds from a stronger dollar.

"The U.S. economy is just really strong, and it is stronger than many other major economies right now," he said.

While Mr. Powell acknowledged the recent stock-market selloff could have an effect on financial conditions that slows growth, he did not suggest it had been enough for the Fed to change its policy plans.

Market conditions are "one of many factors" the Fed considers when deciding where to set interest rates, he said.

Officials voted unanimously in September to raise their benchmark rate to a range between 2% and 2.25%, and they held rates steady at their meeting last week. After the meeting, officials offered a mostly upbeat assessment of the U.S. economy, suggesting another rate increase is likely at their meeting next month.

In September, Fed officials penciled in plans to raise their benchmark short-term rate once more this year. Officials were split over whether to raise it two, three or four times next year. That would push the rate closer to 3%, which is where most officials expect it to settle over the long term -- a so-called neutral rate that neither spurs nor slows growth.

Mr. Powell said Wednesday the main challenge facing the Fed now is to consider how much further and at what pace to raise rates. He said the central bank would evaluate "really carefully...how the markets and the economy and business contacts are reacting to our policy."

Investors were watching Mr. Powell's remarks carefully Wednesday after comments he made at his last public appearance , on Oct. 3, led some investors to believe the Fed might raise rates for longer than they had expected. This fueled worries, in turn, that the Fed might raise rates too much, causing a recession.

Last month, Mr. Powell played down the debate over whether the Fed would raise rates above neutral, saying the concern was premature. Rates are "a long way from neutral at this point, probably," he said during a moderated discussion in Washington. "We need interest rates to be gradually, very gradually, moving back toward normal."

Those comments came amid a raft of strong U.S. economic data. Together, they raised investors' expectations that the Fed favored more rate increases next year. Yields on the benchmark 10-year Treasury note briefly touched a seven-year high in early October. Bond yields rise when prices fall.

Even though the substance of Mr. Powell's October comment largely reflected many Fed officials' public projections, some commentators said his tone reflected greater conviction to raise rates, contributing to the bond-market selloff. Rising bond yields, in turn, sent the stock market on a wild ride last month.

Meanwhile, the unemployment rate held at 3.7% in October, a nearly half-century low, and average hourly wages rose 3.1% from a year earlier, the biggest year-to-year increase since 2009.

Most Fed officials subscribe to some version of a framework that posits wages and prices should rise as the unemployment rate falls below a so-called natural level consistent with stable inflation. Officials, including Mr. Powell, have been careful to note this relationship is weaker than it used to be and that their estimates of the natural rate of unemployment could be wrong.

Inflation will be central to determining how the Fed's policy path evolves. Inflation has been holding near the Fed's 2% target for most of this year after undershooting it for many years. The Fed views inflation around 2% as a sign of balanced supply and demand.

Mr. Powell said Wednesday he was optimistic the U.S. economy could sustain a higher growth rate, which could potentially allow for faster growth without a large increase in inflation. "You always want to be on the optimistic side of this economy," he said.

When asked about President Trump's recent criticism of Fed rate increases, Mr. Powell avoided any escalation. In an interview with The Wall Street Journal last month, Mr. Trump cited the Fed as the top risk facing the economy. He earlier described the Fed as crazy and out of control due to its plans to gradually lift rates despite few obvious signs of inflation.

"We have protections from political involvement," said Mr. Powell, citing legal safeguards that prevent the Fed's decisions from being reversed by the executive branch. Mr. Powell didn't mention Mr. Trump by name.

Mr. Powell also defended the principle of monetary-policy independence for central banks, citing the importance of credibly guarding against inflation by remaining free of politics.

"It enables us to serve the public better," he said. "Central banks, when they get too close to the government, incentives change."

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

November 14, 2018 20:21 ET (01:21 GMT)

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