Rates Rise with Economy Strong

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Fed Chair: Economy is strong, rates will rise

Aug. 24, 2018

 

Expect interest rates to continue the slow, steady march higher. That was the message from Federal Reserve Chairman Jerome Powell at his closely watched speech Friday in Jackson Hole, Wyoming, site of the Fed’s annual retreat.

Powell said he sees economic strength in the U.S. economy and plans to keep on the current policy course. He said the Fed is focused on balancing the dual risk of runaway, inflation-inducing growth and opposing forces that could halt expansion.

“I see the current path of gradually raising interest rates as the [Federal Open Market Committee’s] approach to taking seriously both of these risks,” he said. “As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”

The Fed has approved seven quarter-point rate hikes since December 2015, bringing the target rates up to 1.75 percent to 2 percent. Rates had been at zero during the recession and recovery that began in 2008. There have been two hikes so far this year, and two more are likely coming. 

 

Powell said factors that could change the policy course would include unsteady economic conditions overseas. He also said the bank’s policy would change if the domestic economy took a drastic turn for the worse.

As for inflation, Powell said doing too little to control price increases and economic overheating can be a greater risk than doing too much.

“The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one,” he said. “My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.”

He indicated a general comfort level with current conditions of sustained strong growth and the Fed’s gradual approach to rate increases.

Trump pressures the Fed
The speech won’t likely win Powell favor with the White House. Earlier this week, President Trump continued his verbal pressure on the Fed, saying the central bank should be more accommodating in its interest rate policy.

In an interview with Reuters, Trump said he was “not thrilled” with Powell’s stance on rate hikes. The Fed chairman has presided over two rate increases since his presidential appointment. Rates have increased five times since Trump took office.

“I should be given some help by the Fed,” Trump told the news service. He added the central bank should do “what’s good for the country.”

Housing data
On the housing front, data released this week suggested home price appreciation may be cooling off slightly as summer ends.

The FHFA house price index, released Thursday, rose 0.2 percent in June, one tenth below consensus expectations, and the year-over-year rate slowed to 6.5 percent. Home prices rose in seven of the report’s nine regions, with the largest price increases in the Mountain (+0.7%) and East South Central (+0.6%) regions. Prices declined in the South Atlantic (-0.4%) and New England (-0.4%) regions.

Home price appreciation, driven by demand that outpaces supply, has made affordability a challenge for many buyers. A slower growth rate in home prices may help being balance to a strong seller’s market in many places.

We will see over the coming months if this is a one-month blip or the beginning of a trend.

 

Author of this article: GREG RICHARDSON - EVP OF CAPITAL MARKETS