Fed chair Jerome Powell says US economic outlook strong, sees gradual rate hikes

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Federal Reserve leaves interest rates unchanged

Kaltbaum Capital Management President Gary Kaltbaum and Barron’s senior reporter Mary Childs on whether the Fed should have continued to raise the short-term interest rate and how the market will react to Jerome Powell as Fed president.

Jerome Powell, the new head of the Federal Reserve, said Tuesday in prepared remarks for Capitol Hill testimony that the economic outlook remains strong despite weaker than expected inflation and moderate wage growth.

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Powell was set to testify before the House Financial Services Committee at 10 a.m. ET in his first public appearance since he succeeded Janet Yellen as chairman of the U.S. central bank.

He said he expects both inflation and wage growth to accelerate this year as the economy grows and U.S. fiscal policy becomes more stimulative. He also said he believes that gradually raising interest rates will boost inflation to the Fed's target range and sustain a strengthening labor market.

Previous communications  from the Fed have indicated three rate increases in 2018 with investors expecting the first in March.  Commenting on recent volatility in the markets the Fed chair points out that financial conditions remain accommodative.  He says financial conditions, which had eased substantially in 2017 have reversed that trend but the Fed does not see that weighing heavily on its outlook for the economy, labor market and inflation.

Commenting on recent volatility in the markets the Fed chair points out that financial conditions remain accommodative.  He says financial conditions, which had eased substantially in 2017 have reversed that trend but the Fed does not see that weighing heavily on its outlook for the economy, labor market and inflation.

Investors will be watching to see if Powell cites easy financial conditions and record high levels of the main equity indexes as reasons to raise interest rates more than would otherwise be the case. In previous communications the Fed has indicated it expects to raise interest rates three times this year, with the first increase this month.

The stock market suffered wild swings to begin the month of February, reflecting investor concern that an accelerated pace of inflation growth will encourage Fed officials to boost interest rates more than it previously telegraphed. While the Fed has indicated that three rate hikes are in the pipeline for 2018, reports showing stronger-than-projected wage growth and consumer prices ignited speculation that officials will turn more hawkish.

Still, Wall Street has yet to be convinced that the Fed will even reach three rate increases in 2018. After last week’s publications of the Fed’s minutes from its January meeting, investors are pricing in just two hikes, putting 50% odds on a third. When Powell provides his semiannual testimony to the House Financial Services Committee, his first such appearance since replacing Janet Yellen earlier this month, investors will be doing their best to read the tea leaves amid some uncertainty over the Fed’s next steps.

“If there is a sign that the Fed may be thinking about more than three [rate hikes], there could be some volatility,” Sameer Samana, global equity and technical strategist at Wells Fargo Investment Institute, told FOX Business. “We do not expect that, and our current forecast calls for just two increases.”

Economists mostly viewed Powell’s ascent to the chairmanship as a continuation of Fed policies during Yellen’s tenure. The former investment banker, who is the 16th person to serve in the Fed’s top post, told lawmakers during his confirmation hearing that he would support the ongoing strategy to lift the federal funds target rate gradually and shrink the Fed’s balance sheet of Treasury and mortgage bonds, a process that began in October. Raising rates and downsizing the Fed follows years of near-zero rates and aggressive bond buying in the wake of the 2008 financial crisis.

Wall Street expects Powell to reiterate those themes Tuesday. The expectation remains that Powell will keep pursuing a gradual normalization of Fed policies “in a way that doesn’t derail the economic expansion” in the U.S., Samana said.

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