Washington (AFP) – Historically low unemployment and signs of rising inflation mean there is a “strong” case for continued, steady interest rate hikes, US Federal Reserve Chairman Jerome Powell said Wednesday.
The Fed this month adopted its seventh rate hike since 2015 and forecast an accelerated pace of increases in its benchmark lending rates, predicting a total of four hikes for the year due to robust hiring and economic activity amid rising prices.
Given current conditions, and with “the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong,” Powell said in an address to a European Central Bank forum in Portugal.
The Fed was befuddled last year by the extended weakness in inflation even though unemployment has steadily trended downwards.
But measures of price pressures now show inflation is moving towards the Fed’s two percent target. Still, the central bank has signaled it will not overreact, allowing inflation to run a little hot to offset the years when it ran cold.
Nevertheless, analysts say 2018 could be the year when a set of circumstances — higher oil prices, a weakening dollar and simultaneous global growth not to mention a brewing global trade war — at last combine with scarce labor and rising employment to drive up prices.
Powell also noted, however, that the Fed faced heightened uncertainty when determining the so-called natural rate of unemployment — the level at which labor markets are balanced — making it harder to tell when the central bank should take action.
“Natural rate estimates have always been uncertain and may be even more so now as inflation has become less responsive to the unemployment rate,” he said, according to the text of his prepared remarks.
A less direct relationship between the unemployment rate and price pressures “makes it harder to assess whether movements in inflation reflect the cyclical position of the economy or other influences,” said Powell.