The Chairman of the Federal Reserve, Jerome Powell, speaking at a conference sponsored by the International Monetary Fund and the Swiss National Bank in Zurich said that the financial markets have received the information the central bank is on track for gradual interest rate hikes. He said that the markets should not be surprise as the central bank aims to bring its monetary policy back to pre-crisis levels.
He said that the central bank’s policy normalization proceeded without causing any disruptions to the financial markets and said that the market expectations for monetary policy was aligned with the policymakers expectations.
Powell said that the normalization of monetary policy in other economies will also continue to be manageable especially for the emerging markets.
The U.S. Federal Reserve raised the short term rates six times since the first rate hike in December 2015. At the recent FOMC meeting that was held in March, the Fed raised rates by 25 basis points and expect two to three rate hikes for the remainder of the year.
The gradual pace of monetary policy tightening has still managed to keep the financial conditions easy and flexible as it was seen to be supporting the growth in the labor market while the U.S. economy was seen moving at a steady pace.
The most recent GDP data showed that the U.S. economy advanced 2.3% beating estimates of a 2.0% forecast. However, this was a slower pace of increase compared to the fourth quarter of 2017 where the U.S. GDP rose 2.9% on an annual basis.
Consumer prices or inflation was also seen edging higher. The core PCE, which is the Fed’s preferred gauge of inflation, was seen rising to 1.9% at the most recent report.
The central bank, at the monetary policy meeting in April said that it was willing to tolerate an overshoot of inflation target of 2% in the short term. This statement helped to ease the market nerves as investors feared a faster pace of rate hikes if inflation ticked higher.
The Fed Chair, Powell said that the role of the U.S. monetary policy was exaggerated as a force that contributes to the financial conditions in other economies, especially the emerging markets. He said that while there was a spillover of the effects of higher borrowing costs, this was mostly attributed to the U.S. dollar’s status as a reserve currency.
“I do not dismiss the prospective risks emanating from global policy normalization,” the Fed chair said, noting that despite all efforts, some institutions and economies are still not well positioned to interest rate hikes despite the markets widely expecting the same.
The Fed Chair’s speech comes just a week after the FOMC left interest rates unchanged and signaled its willingness to tolerate higher inflation. Besides Powell, other FOMC members also spoke during the week.
Thomas Barkin, the newly appointed governor of the Richmond Federal Reserve said that there was an overwhelmingly positive case for higher interest rates. He said that it was hard to justify an accommodative monetary policy given the economy being reasonably strong.
Speaking about the core PCE which rose 1.9% annual as of March, Barkin said that inflation was effectively at the Fed’s symmetric target of 2%. However, Barkin cautioned that policymakers will continue to watch closely despite consumer prices staying stable for the moment.
The next Federal Reserve meeting will be held in June where expectations for another rate hike remain reasonably high. By then, the first quarter GDP data will be confirmed including latest inflation reports for the month of April which could add more confidence to the markets about a June rate hike. Especially as the FOMC speeches confirm Fed’s view.
