Powell Plays Down Overheating Risk While Asserting Gradual Path

(Bloomberg) -- Federal Reserve Chairman Jerome Powell pushed back against the notion that the U.S. economy is close to overheating, as he fine-tuned the message on his outlook while reinforcing his commitment to a gradual pace of policy tightening.

Powell spoke to lawmakers on Thursday for the second time this week and less than a month after taking the helm of the U.S. central bank. He inherited an economy where inflation is lackluster despite an unemployment rate that's at about a 17-year low.

“By continuing to gradually raise interest rates over time,” he told the Senate Banking Committee, the central bank is trying to “achieve inflation moving up to target but also make sure the economy doesn't overheat.”

“There's no evidence the economy is currently overheating,” he added.

Powell spoke just after a series of government data gave further evidence that economic growth is picking up and the job market is getting tighter. Unemployment claims fell to the lowest level in almost five decades, while real disposable income grew in January by the most since 2015 amid lower taxes and higher bonuses. Manufacturing also picked up, according to the Institute for Supply Management.

The Dichotomy

For all the signs of strength, inflation in January rose just 1.7 percent, still stuck below the Fed's 2 percent target as it has been for most of the past five years.

Powell's remarks to the Senate, which followed Tuesday's testimony before the House, reflected the dichotomy. The economy is telling the Federal Open Market Committee to keep moving on monetary tightening, while inflation and wages are telling them to go gradually.

Fed officials “are on the lookout for potential risks to the upside,” said Omair Sharif, senior U.S. economist at Societe Generale in New York. “But inflation is not running away by any means, and that doesn't take us away from the three- or four-rate-hike path they are on.”

During his two days of testimony, investors saw several facets of the new chairman.

He comes to the job with intense vigilance on a changing economic outlook and a greater sense of upside risks than was communicated by his predecessor Janet Yellen.

‘Strong Momentum'

“We've got an economy with strong momentum. We've got strong job creation as a result of it. We've got low unemployment. And I do think you will begin to see wages coming up,” Powell said in response to a question Thursday. That's “what we're waiting to see. Hope we see it soon. Expect to see it.”

Remarkably, however, Powell doesn't have a precise inflection point for what would mark the end of labor market slack. He is willing to explore lower ranges of unemployment so long as interest rates move up gradually.

He said the economy is “very close to full employment.” Still, “we don't see any strong evidence yet of a decisive move up in wages,” he remarked, adding there are still places where there may be additional slack.

Powell also showed that he will draw bright lines around the Fed's mission. Despite prodding from lawmakers, he refused to stray into politically controversial topics such as immigration, climate change and fiscal policy. Even when a question on immigration was cast in economic terms, Powell demurred.

‘Very Hot'

“I don't want to wade into a very hot political discussion,” Powell said during his House testimony Tuesday.

Finally, there aren't a lot of downside risks in Powell's outlook right now.

He repeated that fiscal policy could boost productivity and in turn lead to higher wages, all of which would imply a steeper interest rate to balance out supply and demand in the economy. His fellow Trump-selected colleague, Fed Governor Randal Quarles, expressed similar optimism in a Feb. 26 speech.

“They just think the economy looks pretty good,” said Harm Bandholz, chief U.S. economist at UniCredit Bank AG in New York. “The underlying idea is still that you don't want to get really far behind the curve” on raising interest rates.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Randall Woods

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