Federal Reserve Chairman Jerome Powell took the message to Congress on Tuesday that the central bank is in no rush to raise rates too quickly in 2019 despite risks facing the US economy.
In prepared testimony, Powell, the world’s most powerful central banker, stuck with the Fed’s previous commitments to be “patient” as it weighs future rate hikes after floating plans to raise interest rates three times or more this year. It now expects to raise rates only two times in 2019.
“Over the last few months we have seen some crosscurrents and conflicting signals,” Powell said in prepared testimony to start two days of hearings on Capitol Hill on the state of the economy.
The Fed chairman had previously described a number of factors that could result in a “less favorable outlook” for the US economy since last year, prompting policy makers to pump the brakes on its plans.
The central bank has pointed to a spike in volatility in financial markets at the end of last year as one reason. It’s also noted less supportive financial conditions and a slowdown of growth in China and Europe. And there’s uncertainty around unresolved government policy issues, including ongoing trade negotiations with China and the United Kingdom’s exit from the European Union as reasons to be more cautious.
“In January, with inflation pressure muted, the FOMC determined that the cumulative effects of these developments, along with ongoing government policy uncertainty, warranted taking a patient approach with regard to future policy changes,” said Powell, referring to the Federal Open Market Committee, the Fed’s interest-rate setting panel.
Central bankers unanimously agreed at their first meeting in 2019 to keep the federal funds rate, which influences the cost of mortgages, credit cards and other borrowing, at a range of 2.25% to 2.5%. Some policymakers even suggested pausing future hikes altogether.
In his testimony, the chairman stressed the Fed’s policy approach will continue to depend on incoming data in making decisions to lift or lower interest rates.
“We will carefully monitor these issues as they evolve,” said Powell, echoing previous statements about challenges facing the economy, which is expected to slow down in 2019.
The Fed chairman also cited longer-run challenges facing the United States. He pointed to slower productivity growth, which has until recently depressed wage growth and living standards throughout the country. There’s also the ballooning federal debt, which ticked up to $22 trillion — the highest it’s ever been.
“As a nation, addressing these pressing issues could contribute to the longer-run health and vitality of the US economy,” said Powell.
Powell also said the 35-day partial government shutdown had created “significant hardship” for federal employees, but that the negative effects on the economy were expected to be “fairly modest and to unwind over the next several months.”
The Congressional Budget Office has previously estimated that the shutdown, which led to delayed paychecks, reduced working hours and stalled contacts, would result in a permanent loss of about $3 billion in gross domestic product over the five-week period.
President Donald Trump has repeatedly railed against the Fed’s rate changes, breaking precedent by openly attacking Powell and expressing his hopes via Twitter that governors would keep rates steady, a move that could risk letting the economy overheat amid continued strong hiring.
Powell, who took the unusual step of meeting Trump for dinner in early February, has repeatedly rejected any idea the Fed has caved to political pressure by taking a dovish approach, noting his only motivation is do the “right thing for the economy and the American people.”
But on Monday, Powell’s predecessor Janet Yellen, the first woman to serve as Fed chair, answered the question a bit more bluntly. She said she doesn’t believe Trump understands monetary policy or what the Fed does, according to an interview with Marketplace’s Kai Ryssdal.
“Do you think the president has a grasp of macroeconomic policy?” Ryssdal asked.
“No, I do not,” Yellen replied. “I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed.
“He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy and appropriate policy goals.”