Federal Reserve Chairman Jerome Powell on Tuesday will promise lawmakers that the Fed will keep a careful eye on inflation as the bank prepares to hike interest rates in a strengthening economy.
Powell, in his first testimony as Fed chairman, will say that the Fed expects to raise interest rates as it weighs low inflation against an expanding economy.
While inflation is still lagging below the Fed’s target range of 2 percent, Powell will remark that “further gradual increases in the federal funds rate will best promote attainment of both of our objectives.”
Powell’s appearance before the House Financial Services Committee comes as Fed observers try to predict how the bank will act on interest rates this year and the direction the bank sees the economy going.
The Fed has forecasted three rates hikes in 2018, the first of which will likely occur next month.
The U.S. is near full employment and the tight labor market is finally starting to drive up wage growth and prices. The Fed is aiming to raise rates quickly enough to prevent the economy from overheating but wants to keep from short-circuiting the financial markets.
Powell will say that the economic outlook “remains strong.”
“The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment,” Powell will say.
Inflation will be a key element in whether the Fed raises rates than three times. It has lingered below the 2-percent annual increase in the personal consumption expenditures (PCE) price index the Fed considers ideal for the U.S. economy.
Powell will say that the Fed will “continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis.”
Fed officials have largely predicted that inflation will rise as the economy continues to grow and low unemployment pushes wages higher. The central bank also expects the economy to expand at a greater pace due to the $1.5-trillion tax cut passed at the end of 2017.
Powell will note that the U.S. is enjoying “solid growth and a strong labor market,” and will point to increases in consumer spending, wage growth, demand for U.S. exports and business investment.
He’ll also note that the labor force participation rate had remained unchanged, an encouraging sign given the mass departure of baby boomers from the workforce.