US Federal Reserve to continue gradual rate hikes to manage potential risks

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Published: August 25, 2018 5:42:09 AM

US Federal Reserve Chair Jerome Powell has reiterated that the central bank will stick to the strategy of gradual rate hikes to manage potential risks and support domestic economic recovery.

us federal reserve, us, us economyThe Federal Reserve in June increased interest rates for the second time this year. (Reuters)

US Federal Reserve Chair Jerome Powell has reiterated that the central bank will stick to the strategy of gradual rate hikes to manage potential risks and support domestic economic recovery.

Speaking on Friday at an annual economic symposium in Jackson Hole, Wyoming, Powell said the central bank faces two major risks — “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating”, Xinhua reported.

“I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks,” he said, referring to the Federal Open Market Committee (FOMC), the Fed’s policy-making committee.

While US inflation has recently moved up near 2 per cent, Powell said he sees “no clear sign of an acceleration above 2 per cent” and there does not seem to be “an elevated risk of overheating.”

“This is good news, and we believe that this good news results in part from the ongoing normalization process, which has moved the stance of policy gradually closer to the FOMC’s rough assessment of neutral as the expansion has continued,” he said.

Powell’s remarks came after President Donald Trump last week criticized the central bank’s rate hikes and expressed his displeasure with the Fed chair at a Republican fundraising dinner.

Trump said that he had nominated Powell to lead the central bank because he expected him to keep interest rates low, according to local media reports.

But Powell signalled on Friday that the Fed is likely to continue gradually increasing interest rates as the U.S. economy “is strong” and inflation is near the central bank’s 2 per cent target.

“If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate,” he said.

The Fed in June increased interest rates for the second time this year, and pencilled in two more rate hikes for the year. Most market participants had expected the central bank to raise rates again in September and December.

However, some Fed officials worried that an escalation in current trade disputes could force the central bank to rethink its interest rate hike plans, according to the minutes of the Fed’s latest monetary policy meeting.

“Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment,” said the minutes of the Fed’s July 31-August 1 meeting released on Wednesday.

“Moreover, wide-ranging tariff increases would also reduce the purchasing power of US households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains,” the minutes said.

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