By Nick Timiraos
Jerome Powell is stressing continuity as he takes over as Fed
chairman, which suggests the central bank will keep gradually
raising interest rates this year, unperturbed by recent market
volatility and signs of firming inflation.
Fed officials are on track to raise interest rates at their
March meeting, as widely anticipated by investors.
A bigger question for markets is whether officials pencil in a
total of three rate increases this year, as they did in December,
or if strong growth and new fiscal stimulus prompt them to add a
fourth.
Policy makers don't see such projections as particularly
consequential now, according to recent interviews and public
statements, because they'll have plenty of time to adjust their
plans as the year unfolds.
"While the challenges we face are always evolving, the Fed's
approach will remain the same," said Mr. Powell at his swearing-in
ceremony earlier this week. "We are in the process of gradually
normalizing both interest-rate policy and our balance sheet with a
view to extending the recovery."
The Fed has raised its benchmark short-term rate five times
since December 2015 to a range between 1.25% and 1.5%.
Officials have largely shrugged off the stock market's recent
turbulence as unlikely to hurt the economy, which has been growing
at a solid pace. It would take a more serious financial-market
disturbance to prompt a change in plans.
"My outlook hasn't changed because the stock market is a little
bit lower than it was a few days ago," said New York Fed President
William Dudley last week. "It's still up sharply from where it was
a year ago."
Before the market selloff earlier this month, officials had been
more uneasy about low volatility and high asset values, raising the
risk of more damaging market turmoil.
Fed officials also welcome signs inflation is rising toward
their 2% target, a level they view as consistent with a healthy,
expanding economy.
Prices excluding volatile food and energy categories rose 2.6%
in January on a six-month annualized basis, up from a 1.1% gain in
July and one of the strongest periods in years, according to the
Labor Department's consumer-price index released this past week.
The Fed's preferred inflation gauge is projected to rise 1.6% in
January from a year earlier, according to Morgan Stanley
economists.
Top officials are unlikely to change course in response to such
figures, just as they didn't veer from their path last year when
inflation was a bit weaker than they expected.
They also don't yet see signs inflation is headed much above
their target.
Complicating Mr. Powell's job are the recent tax cuts and
government spending increases approved by Congress and President
Donald Trump, which should boost economic growth at least this year
and next.
The $1.5 trillion tax-cut package was slightly larger and more
frontloaded than the plan on the table in mid-December when
officials made their most recent economic projections. And that was
before the deal last week to increase federal spending by $300
billion over the next two years.
Both changes have bolstered the Fed's projection of stronger
growth this year. This could nudge up inflation, though possibly at
a slower pace than might have occurred in the past.
The upshot is that for the first time since Fed officials began
raising rates in 2015, their discussions this year appear likely to
center on whether to move a touch faster than projected versus a
touch slower.
For now, that debate doesn't reflect any broader rethink under
way. The Fed is a glacial institution that doesn't plot rapid
changes in course with just a handful of data points.
"I feel strongly and have a lot of conviction the base case
should be three moves for this year, and if I'm wrong, it could
even potentially be more than that," said Dallas Fed President
Robert Kaplan in an interview last month.
Last week's spending bill prompted several forecasters,
including at Nomura Securities, UBS AG, and Oxford Economics, to
revise up their projections of Fed rate increases this year to
four, from three, joining others at J.P. Morgan and Goldman Sachs,
which have already been predicting four rate increases.
Mr. Powell, the first noneconomist to lead the bank in more than
three decades, could face more difficult decisions later this year
and next year if wages or prices show signs of breaking much higher
or financial bubbles emerge.
In his nearly six years at the central bank, Mr. Powell has
established a reputation as a consensus-oriented leader focused on
careful analysis, suggesting he isn't likely to chart a new course
without substantial evidence that argues for it.
"We approach every issue through a rigorous evaluation of the
facts," Mr. Powell said this week. That approach also includes
listening to "well-informed critics," he said.
Mr. Kaplan said Fed officials already know Mr. Powell's
leadership. "You can hire an outside CEO and everybody has to
adjust," he said. "If you promote from within...it gives you a
person who is ready to lead the organization [on] day one."
Mr. Powell is contemplating steps to make the organization more
transparent to the public and less bureaucratic internally,
extending an evolution started by his predecessors.
Mr. Powell has encouraged the Fed's staff to provide quick and
informal analysis, reflecting a more businesslike culture at an
institution that has tended to prize rigorous reviews that can take
long to gestate.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
February 16, 2018 20:05 ET (01:05 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.