Fed’s Powell Says Case for Rate Hike Has ‘Clearly Strengthened’

  • Says patience ‘paid dividends’; Fed shouldn’t wait too long
  • Longer-term challenges to growth require better fiscal policy

Why a December Fed Rate Hike May Not Be a Sure Thing

Federal Reserve Governor Jerome Powell signaled his readiness to raise interest rates, as unemployment and inflation approach the central bank’s goals.

“The case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month,” Powell said in the text of a speech he is scheduled to deliver Tuesday in Indianapolis. He was referring to the Nov. 1-2 session of the Federal Open Market Committee. 

“The committee has been patient about raising rates,” he said. “That patience has paid dividends. But moving too slowly could eventually mean that the committee would have to tighten policy abruptly to avoid overshooting our goals.”

Policy makers are widely expected to lift the Fed’s benchmark borrowing rate when they gather next month in Washington, which would mark only the second increase since the economic expansion began in 2009. Chair Janet Yellen indicated in testimony to Congress earlier this month a rate increase could happen “relatively soon” if the economy continues to show further progress.

Inflation, Unemployment

The Fed’s preferred gauge of price pressures, after removing food and energy components, rose 1.7 percent in the 12 months through September. Unemployment stood at 4.9 percent in October, close to most economists’ estimates of its lowest sustainable level.

Powell said he expects the economy to continue to grow at about 2 percent, with strong job gains and a gradual rise in the pace of inflation to the central bank’s 2 percent target.

“The main risks I see to that outlook are from abroad,” he said. With growth and inflation low in other parts of the world, and with U.S. interest rates so low, “we are not well positioned to respond to negative shocks,” he said.

Since the FOMC last met this month, economic conditions have continued to improve, strengthening what the FOMC had already judged to be a solid case for a rate rise. Retail sales in September and October showed the biggest back-to-back gains since 2014, while surging stock indexes have boosted household wealth.

Gross domestic product expanded at a 3.2 percent annualized rate in the three months ended in September, the fastest in two years, compared with an initial estimate of 2.9 percent, Commerce Department figures showed Tuesday. The revised growth figure mainly reflected changes to the pace of consumer spending and residential investment. 

Economists surveyed by Bloomberg expect another solid jobs number on Friday when the Labor Department releases its employment report for November. Their median estimate is for 180,000 new jobs, in line with the monthly average this year.

Powell, 63, joined a number of senior Fed officials, including Yellen, who have since the Nov. 8 elections called on Congress and President-elect Donald Trump to concentrate new fiscal policy measures on lifting productivity. Trump promised during his campaign to invest as much as $1 trillion in infrastructure over 10 years, boost defense spending and cut taxes.

“Increased spending on public infrastructure may raise private-sector productivity over time, particularly with the growth of the stock of public infrastructure near an all-time low,” Powell said.

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