Fed’s Powell downplays risk of overheating, still expects gradual rate-hike pace

Federal Reserve Chairman Jerome Powell has said that the United States of America central bank’s gradual path of interest-rate hikes remains appropriate as there does not seem to be “an elevated risk of overheating.” In his closely-watched speech opening the Jackson Hole summer retreat, Powell said inflation has recently moved up near 2% but “we have seen no clear sign of an acceleration” above that level. “My colleagues and I believe that this gradual process of normalisation remains appropriate,” he said.

Economists define a “gradual” pace as one quarter-point interest rate hike per quarter. The Fed has penciled in two more rate hikes this year. Investors see a 90% chance of a move in September and a 60% probability of a rate hike in December. At the same time, the Fed is gradually allowing its balance sheet to shrink. Stocks already firmer on the day, held their gains as Powell largely reaffirmed the gradual rate-hike path that the market has been banking on. Benchmark Treasury yields   pared their climb as Powell’s remarks hit, while the dollar index  deepened its loss.

“With solid household and business confidence, healthy levels of job creation, rising incomes and fiscal stimulus arriving, there is good reason to expect this strong performance will continue,” Powell said. Powell said there are risk factors “abroad and at home that, in time, could demand a different policy, response,” but he did not elaborate. The Fed chairman noted that the changing economic structure made it hard for the Fed to navigate policy. He noted research that called for moving cautiously in periods of uncertainty. Powell said inflation might no longer be the best signal of rising pressure on resource utilisation.

“Whatever the cause, in the run-up to the past two recessions, destabilising excesses appeared mainly in financial markets rather than in inflation,” he said. “Thus, risk management suggests looking beyond inflation for signs of excesses,” he said. He noted that regulators have worked over the last 10 years to increase the strength and resilience of the financial system, with the aim of reducing future crises. Powell pledged the Fed would “do whatever it takes” to avoid another financial crisis or another period where short-term rates get stuck near zero. He also said the Fed would respond in a similar fashion should inflation threaten to get out of control.