The Federal Reserve will continue to raise rates gradually as the US economic outlook remains strong despite uncertainty over trade policy, Fed Chairman Jerome Powell said Tuesday. Powell was upbeat about the US economy, noting that job creation remained strong and inflation was right around the Fed's two percent target.
In addition the recent tax cut is fueling consumer spending, and business investment remains strong, he said in his semi-annual testimony to the Senate Finance Committee. However, he acknowledged that it was "difficult to predict the ultimate outcome of current discussions over trade policy," a clear reference to the aggressive tariffs President Donald Trump has imposed on products from China and many US trading partners, sparking outrage and retaliation.
The International Monetary Fund warned Monday escalating trade tensions and tariff threats, if carried out, could disrupt global growth and derail investments.
Still, Powell said the Fed's interest rate-setting Federal Open Market Committee was satisfied with the central bank's efforts to get monetary policy back to normal by raising rates and reducing the size of investments accumulated in the wake of the 2008 financial crisis.
"With a strong job market, inflation close to our objective and the risks to the outlook roughly balanced, the FOMC believes that - for now - the best way forward is to keep gradually raising the federal funds rate," Powell said in his prepared testimony.
The FOMC increased the benchmark lending rate by a quarter percentage point in March and in June - a total of seven times since December 2015 - and most economists expect two more rate hikes this year.
Trade uncertainty
After two percent GDP growth in the first three months of the year, "the latest data suggest that economic growth in the second quarter was considerably stronger than in the first," Powell told lawmakers.
But in response to repeated questions from Senators, the Fed chief acknowledged that if the current trade frictions lead to higher tariffs, that could harm the US and global economies, in particular American farmers.
Trade policy "has significant effects on the economy," Powell said, and "there is no precedent for this kind of broad trade discussion."
If the end result is lower tariffs globally "that would be good," but if higher tariffs are in place for a longer time "that will be bad for our economy and other economies."
He said an open and rules-based international system "has served us very well" in bringing down barriers to trade.
But Powell said the Fed was now hearing about companies putting investment plans "on ice for the time being."