Federal Reserve Chair Jerome Powell said on Tuesday he expects wage growth to accelerate over the course of the coming year, thanks in part to recent policies implemented by the Trump administration.
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“Frankly, I do expect to see more increases in wages in the next year or so,” Powell said during testimony before the House Financial Services Committee. “Lower corporate taxes should lead to higher investment … higher investment should lead to higher productivity over time and higher productivity should lead to higher wages over time.”
The Fed chair added that it would be hard to quantify at this time how large the effects on wage growth would be after the administration’s tax overhaul lowered the corporate tax rate by 14 percentage points to 21% at the outset of 2018.
In January, average hourly earnings rose 2.9%, the highest amount since June 2009. Wages have remained largely stagnant throughout the recovery, despite gains in other areas like employment.
In addition to the potential for accelerated wage growth, Powell said he believes the combination of the Tax Cuts and Jobs Act, passed in December, and the spending bill, passed earlier this month, will “meaningfully increment demand at least for the next couple of years.”
Investors have been concerned that stronger economic data could cause the Fed to raise interest rates at a faster clip than expected in 2018. Board members have said the central bank will likely raise the benchmark rate three times throughout the course of the year. Powell, acknowledging strong indicators in the economy, said on Tuesday that FOMC members would be evaluating all economic information available when making decisions about the future course of interest rate increases at their next meeting in March.
Meanwhile, inflation has remained below the Fed’s 2% target. Like his predecessor Janet Yellen, Powell could not say whether weak inflation throughout recent years can be attributed to transitory factors or structural elements. He did say he expected inflation to stabilize near the Fed’s objective over the course of this year.
Powell indicated his commitment to continuing along the path toward policy normalization as laid out by Yellen, expecting the Fed to have a more stabilized balance sheet within about four years.
After Powell’s testimony on Tuesday, the Dow Jones Industrial Average sank about 170 points into the red.