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)
Copyright (c) 2018 Dow Jones & Company, Inc.