Powell Suggests Fed Is Likely to Raise Rates in December

Federal Reserve governor Jerome Powell indicated Tuesday the central bank is likely to raise short-term interest rates at its policy meeting next month.

"Conditions are supportive" of another quarter-percentage-point increase in the Fed's benchmark federal-funds rate at its meeting Dec. 12-13, he told a Senate panel Tuesday at a hearing on his nomination to be the Fed's next chairman.

"I think the case for raising rates at our next meeting is coming together," he told the Senate Banking Committee, but cautioned that no final decision will be made until the meeting.

A rate increase next month would be its fifth such move in two years and would lift the rate to a range between 1.25% and 1.50%.

Mr. Powell also said he expects the central bank's portfolio of holdings to shrink to a range between $2.5 trillion and $3 trillion over the next few years. "Again, there's no certainty in that," Mr. Powell added, noting that the estimate was his own and not the view of the Fed's policy-setting committee.

He said that at the end of the process of reducing the Fed's balance sheet, it would be "much smaller" than its current $4.5 trillion size but larger than it was before the 2008 financial crisis. He said its ultimate size would depend primarily on the demand for cash, or the money banks hold at the Fed, called reserves.

The Fed accumulated much of those holdings during several rounds of bond purchases aimed at stabilizing markets and supporting the economy during and after the financial crisis. The programs were designed to lower long-term interest rates to encourage hiring, investment and spending.

Now, with the economy growing at a healthy pace and unemployment low, the Fed is allowing the balance sheet to shrink gradually by allowing some of its Treasury and mortgage-backed securities to mature without reinvesting the proceeds.

That process of reducing the balance sheet to its new "equilibrium size" will take three or four years, he said, addressing an issue of acute interest to financial markets.

"It will be no larger than it needs to be for us to conduct monetary policy," he said.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

November 28, 2017 11:48 ET (16:48 GMT)