Powell Says Fed Should Keep Gradually Raising Interest Rates

Fed chief delivers an upbeat economic assessment to Congress, but opens door to potential policy shift

By Nick Timiraos of The WSJ.

In addition to the usual macro issues, the article also mentions international trade. Of particular importance to me was the statement about tariffs causing higher inflation. If tariffs are like excise taxes, they cause supply lines to shift to the left. Not only does that raise prices but output falls and firms might layoff workers. It will depend on how high the tariffs are and how many products are affected.

Excerpts from the article:

[there is] "less certainty about the rate path as the Fed raises its benchmark rate toward a so-called neutral level that neither spurs nor slows growth."

"The Fed tries to set rates with an eye toward the economy’s performance a year ahead because monetary policy operates with a lag."

"Trade disputes have mixed implications for Fed policy. On one hand, they could slow economic growth, causing officials to hold off on rate rises. Or tariffs could push up inflation, requiring a steeper path of increases."

"Mr. Powell, in a radio interview last week, said the Fed could ignore the price increases from tariffs if officials conclude they represent a one-time rise that won’t be incorporated into businesses’ and consumers’ expectations of future inflation.

Interpreting the price data could grow more complicated because many Fed officials believe inflation should accelerate as unemployment falls, and vice versa. While that relationship was been very weak over the past decade, officials expect that as labor market slack disappears, wages and prices should rise more quickly.

If a tight labor market appears to be pushing wages higher at the same time tariffs are driving up prices, “it’s going to be a little bit harder to disentangle,” said Mr. Rosengren.

Central bankers like to maintain inflation around 2%, seeing it as a sign of a healthy economy.

Inflation is close to the Fed’s 2% target after undershooting it for many years. Consumer prices in May rose 2.3% from a year earlier. Excluding volatile food and energy categories, they rose 2%, according to the Fed’s preferred inflation gauge."