Powell Suggests Fed Is Likely to Raise Rates in December -- 2nd Update

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.

Mr. Powell declined to weigh in on questions from the panel's top Democrat, Sen. Sherrod Brown of Ohio, about the potential effect of a major tax cut, which GOP lawmakers hope to approve before the end of the year.

Mr. Brown pressed Mr. Powell on whether the Fed's own economists had modeled the economic impact of the tax bill moving through Congress, and said lawmakers rely on the Fed for that analysis.

"Respectfully, I don't think you rely on us to score fiscal proposals," Mr. Powell said. "That's not really our role, and I don't have a forecast for you on that today."

Mr. Powell said policy makers "need to be concerned with fiscal sustainability over the long run," and agreed that adding $1.5 trillion to the federal debt would be bad for fiscal sustainability "all else equal." The Senate GOP tax proposal would allow the debt to increase by about that much over the next decade, although administration officials have said the cost would be offset by stronger economic growth that brings in higher tax revenue.

Asked about his projections for economic growth, Mr. Powell said he expects to see gross domestic product increase by 2.5% this year and a pace "pretty close to that" heading into next year, based on high confidence among businesses and the fact that monetary policy conditions are still relatively accommodative.

In his prepared testimony, Mr. Powell said Fed officials continue to expect interest rates to rise "somewhat further" and the size of the central bank's balance sheet to shrink gradually.

As the next Fed chairman, Mr. Powell said he would "do everything in my power" to achieve the Fed's dual goals of maximum employment and steady, low inflation, "while preserving the Federal Reserve's independent and nonpartisan status that is so vital to their pursuit."

"I am committed to making decisions objectively and based on the best available evidence," he told the committee. "In doing so, I would be guided solely by our mandate from the Congress and the long-run interests of the American public."

Asked what he would do to protect the Fed from political interference from the Trump administration, Mr. Powell said "nothing in my conversations with anyone in the administration has given me any concern on that front."

He later added that he strongly opposes legislation that would allow the Government Accountability Office to audit Fed interest-rate decisions. The Fed's financial records are already audited, and Congress has long exempted interest-rate decisions from GAO oversight, he said.

"That is I think a wise choice that's been made as a way of showing respect for the independence of monetary policy," he said.

Mr. Powell also faced questions from Democrats over his commitment to regulatory changes implemented in the wake of the financial crisis, and to holding large financial firms accountable. Mr. Powell held firm to his previous statement that he believes some rules should be re-evaluated to make sure they are efficient and tailored to the risks of individual firms.

Pressed by Sen. Elizabeth Warren (D., Mass.) over whether he thought any financial rules should be strengthened, Mr. Powell said no.

"Honestly, I can't really think of a place where we are lacking an important rule," he said. "I think we've filled out the rules that we need."

"I've got to say, that worries me," Ms. Warren said.

He also faced some criticism over his schedule, which showed he had met far more often with representatives from the financial industry than with consumer groups.

When President Donald Trump announced he would nominate Mr. Powell to become Fed chairman, Mr. Trump said the Fed governor had the "wisdom and leadership" to guide the economy through any potential turbulence. If confirmed by the Senate, Mr. Powell would succeed Fed Chairwoman Janet Yellen in February. Mr. Trump's decision marked the first time in decades that a first-term president hasn't offered a second term to the incumbent Fed leader.

Mr. Powell, who has served on the Fed board since 2012, is expected to see a relatively smooth path to confirmation. The Senate approved his nomination to the Fed board in 2012 and 2014 with broad bipartisan support, and no senator has signaled plans to vote against him for chairman.

Ms. Yellen said last week she intends to resign from the Fed board once a new Fed leader is sworn in, after her term as chairwoman expires. She now also is serving a term as governor that expires in 2024.

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

(END) Dow Jones Newswires

November 28, 2017 12:24 ET (17:24 GMT)