WASHINGTON – Jerome Powell, the new chairman of the Federal Reserve, painted an optimistic picture of the U.S. economy Tuesday and signaled that he will continue to bolster strong growth during testimony before Congress in his public debut as head of the central bank.
Powell, in remarks to the House Financial Services Committee, said the job market and business investment continued to strengthen, and that headwinds once holding back the U.S. economy had now turned into tailwinds.
But he emphasized that he planned to continue the policies of his predecessor, Janet Yellen, who managed to gradually raise interest rates during her four-year term while still encouraging broad economic growth.
The Fed "will continue to strike a balance between avoiding an overheated economy" and allowing inflation to tick up toward the Federal Reserve's 2 percent target, Powell said. "Further gradual increase in the federal funds rate will best promote attainment of both of our objectives," he added.
Powell, a member of the Fed's board of governors who was sworn in as chairman earlier this month, faces two days of testimony before the House and Senate, his first public appearance in his new role.
His testimony comes at a critical moment in the economy's trajectory, as global economies are strengthening and as the Trump administration's $1.5 trillion tax cuts begin adding economic fuel to the United States.
Investors are eagerly awaiting signs of how the Fed, under Powell's leadership, will respond, and whether it will seek to raise interest rates more quickly than expected. In his testimony, Powell sought to reassure the markets that, at least for now, he believes the Fed's current path is the right one.
The Fed has forecast three rate increases in 2018. But some investors believe the central bank could lift its rate four times this year, especially if the Trump administration's tax cuts, which took effect in January, provide a larger-than-expected boost to the economy and inflation.
At the beginning of February, data showing wage increases — a potential result of inflation — triggered a sharp sell-off in stock markets. Major markets have recovered most of those losses in the last few weeks and are trending again toward all-time highs.
In his remarks, Powell downplayed concerns of market volatility, saying that financial conditions have become a little tighter, but not so tight as to weigh heavily on growth. And he continued to indicate that he sees the stronger economic news as a reason to carry out their plans for gradual rate hikes, rather than as a reason to start raising rates more quickly. Most Fed officials predicted in December the Fed would raise rates three times in 2018, as it did last year.
Lawmakers grilled Powell on financial regulation, the rollback of the Fed's balance sheet, the effect of Trump administration tax cuts, and racial discrimination in mortgage lending.
In his responses, Powell suggested that he and other central bankers could be re-examining their prediction of three more rate hikes this year, given the passage of the Trump tax cuts and strong economic data since they made their last forecast in December.
In the interim, the Fed has seen continuing strength in the labor market, data that suggest inflation is moving toward its target, more stimulative fiscal policy, and continued economic strength around the globe, Powell said.
"My personal outlook for the economy has strengthened since December," he said. "I would expect the next two years on the current path to be good years for the economy."
He added that the Fed must be alert to both the buildup of financial imbalances and inflation, but that neither risk appeared high at the moment.
"There's always a risk of a recession at any point in time, but I don't see it as at all high at the moment," Powell added.
Powell declined to comment in detail on fiscal policy but said the United States should be careful not to default on its debt, and that any spending should be directed at increasing the productive capacity of the economy. "We really need to get on a sustainable fiscal path, and the time to really be doing that is now," he said.