By Nick Timiraos
WASHINGTON -- Federal Reserve Chairman Jerome Powell delivered
an upbeat assessment of the economy and said it justified continued
interest rate increases. But he opened the door to a potential
policy shift and outlined risks if escalating trade tensions result
in permanently higher tariffs.
Mr. Powell has mostly sidestepped recent questions on trade
policy because he says it is outside of the Fed's responsibilities.
He offered words of caution Tuesday at a hearing before the Senate
Banking Committee.
"In general, countries that have remained open to trade, that
haven't erected barriers including tariffs, have grown faster.
They've had higher incomes, higher productivity," said Mr. Powell.
"And countries that have gone in a more protectionist direction
have done worse."
Mr. Powell affirmed the Fed's plans to continue with gradual
rate increases, and he said it was too soon to say if trade
disputes might interfere with those plans. The central bank's
rate-setting committee "believes that -- for now -- the best way
forward is to keep gradually raising" its benchmark short-term
rate, he said.
The addition of the qualifier "for now" to Mr. Powell's
statement was new, emphasizing that policy decisions aren't on
autopilot. The phrase also signaled less certainty about the rate
path as the Fed raises its benchmark rate toward a so-called
neutral level that neither spurs nor slows growth.
The Fed raised that rate in June by a quarter percentage point
to a range between 1.75% and 2%, the second such increase this
year. Most Fed officials penciled in a total of at least four rate
increases this year and three more next year.
Most of them expect they will need to raise the rate to a
neutral level, which could be reached in the next year, but they
haven't resolved whether or how much higher to go after that.
The Fed expects recent tax cuts and an increase in federal
spending to boost spending and investment at a time when the labor
market is already tight. This has put officials on the lookout for
signs the economy could be overheating.
Intensifying trade disputes, on the other hand, could hurt
business confidence and roil financial markets if U.S. companies
face higher prices or supply-chain disruptions.
Senators of both parties raised concerns Tuesday about President
Donald Trump's decisions to impose new tariffs on trading partners
and threaten more to come, prompting other countries to do the same
to the U.S.
If the Trump administration's trade policy in the end "results
in lower tariffs for everyone, that would be a good thing," Mr.
Powell told lawmakers. "If it results in...higher tariffs across a
broad range of traded goods and services that remain that way for a
long period of time, that would be bad for our economy and for
other economies, too."
Scott Minerd, chief investment officer at Guggenheim Partners,
said investors needed to take more seriously the potential for
disruptions. "Tariffs are a form of taxation that ultimately is
paid not by the exporter, but by the U.S. consumer," he said in a
client note. "Markets are clearly spooked."
The Fed has little reason to change course now because history
is full of examples of tariffs that have been threatened but never
imposed, or imposed only temporarily.
The Fed tries to set rates with an eye toward the economy's
performance a year ahead because monetary policy operates with a
lag. But the central bank has few examples from recent history of
widespread trade disruptions, so Fed officials will have to rely on
current data "a little more than we normally would," said Boston
Fed President Eric Rosengren in an interview last month.
Trade disputes have mixed implications for Fed policy. On one
hand, they could slow economic growth, causing officials to hold
off on rate rises. Or tariffs could push up inflation, requiring a
steeper path of increases.
"Are they fighting the war against inflation or are they trying
to cushion the shock to growth?" said Ethan Harris, chief economist
at Bank of America Merrill Lynch. He said the weakness in overall
growth, rather than faster price increases, would be the Fed's
bigger worry.
Mr. Powell, in a radio interview last week, said the Fed could
ignore the price increases from tariffs if officials conclude they
represent a one-time rise that won't be incorporated into
businesses' and consumers' expectations of future inflation.
Interpreting the price data could grow more complicated because
many Fed officials believe inflation should accelerate as
unemployment falls, and vice versa. While that relationship was
been very weak over the past decade, officials expect that as labor
market slack disappears, wages and prices should rise more
quickly.
If a tight labor market appears to be pushing wages higher at
the same time tariffs are driving up prices, "it's going to be a
little bit harder to disentangle," said Mr. Rosengren.
Central bankers like to maintain inflation around 2%, seeing it
as a sign of a healthy economy.
Inflation is close to the Fed's 2% target after undershooting it
for many years. Consumer prices in May rose 2.3% from a year
earlier. Excluding volatile food and energy categories, they rose
2%, according to the Fed's preferred inflation gauge.
Mr. Powell said Tuesday he took comfort from signs that moderate
wage growth "is not causing high inflation."
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
July 17, 2018 18:02 ET (22:02 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.