Daily Management Review

Jerome Powell is optimistic about the US economy


The US Federal Reserve System (FRS) will continue to adhere to the policy of a gradual rate hike, the new Congressman, Jerome Powell, promised in his first official speech to the US Congress. Toughening of monetary policy, he said, will contribute to higher inflation, improved external economic conditions and fiscal reform in the US. Assessing the optimism of the head of the Fed, experts point to the possibility of four rate increases this year - the first can happen in March this year.

Federalreserve via flickr
Federalreserve via flickr
The condition of the US economy will continue to improve, and this will allow the Fed to gradually raise rates, said Jerome Powell at a hearing in the financial committee of the US Congress. According to him, the rate of tightening will be determined by "balancing between overheating of the economy and the achievement of the inflation target of 2%." Mr. Powell entered the Fed on February 5, 2018 (he was a member of the Board of Governors regulator since 2012).

In his speech, he pointed to the positive statistics of the US economy in the second half of 2017. The average increase in the number of jobs was 175 thousand per month (200 thousand in January 2018), which led to an additional reduction in unemployment to 4.1% - the lowest level since December 2000. The growth of the economy accelerated compared to the first half of the year (from 2% to 3% in annual terms). The growth of wages supported the increase in consumer demand, and there was also a sharp increase in capital investments.

Inflation, however, remained at a low level. By the end of 2017, the growth in consumer prices, which the regulator is targeting, amounted to 1.7%, and excluding food and energy - 1.5%. According to Jerome Powell, the insufficient growth of this indicator was influenced by temporary factors, and they will not be repeated. Positive pressure on inflation, in turn, will increase consumption, favorable external conditions and mitigation of fiscal policy, the Fed head expects. Recall, in addition to the approval of a large-scale tax reform, US lawmakers agreed on an increase in budget spending in the next two years.

The committee members asked the new head of the regulator to evaluate the effectiveness of his "quantitative easing" carried out by his predecessors in 2008-2014, as well as the possibility of the Fed to reduce the "inflated" balance sheet (the volume of assets is estimated at $ 4.4 trillion). Mr. Powell suggested that reducing the balance to the "new rate" will take about four years. In the meantime, in his estimation, the risks for the US financial system, connected with the long period of conducting super-soft policy are "moderate": the cost of a number of assets is overstated, but there is no increase in the debt burden of households.

Most of the congressmen's questions were devoted to financial regulation. Some members of the committee were optimistic about the appointment of the head of the FRS as "not an economist, but a banker", while others were interested in plans to ease the stringent requirements imposed on banks after 2008. Here, Jerome Powell, who earlier expressed his support for the weakening of regulation, actually repeated the position of the former head of the Federal Reserve, Janet Yellen, who opposed the initiatives of the US Ministry of Finance in this area. He pointed to the need to maintain the basic requirements for large players while mitigating the requirements for small regional banks.

"Judging by the speech of Jerome Powell, the main focus of the Fed's policy on the gradual increase in rates has not changed, but the expected increase in inflation and positive factors for the economy indicate the possibility of a more aggressive policy," ING Bank believes. There are now predicting four rate increases this year (members of the Open Market Committee in December pawned three rate increases - as many as they were in 2017). Capital Economics also noted the optimistic tone of the head of the Fed - experts believe that the rate hike at the meeting in March is now almost predetermined.

source: cnn.com, bloomberg.com