Fed favors gradual rate approach: US central bank chief

Chicago (AFP) –


Federal Reserve Chairman Jerome Powell on Friday used his first speech as central bank chief to offer a rosy view of the world's largest economy while predicting only gradual interest rate hikes.

Powell, who took office in February, also said the Fed's drawdown of its bond-buying stimulus program was proceeding "smoothly."

Global stock markets have been anxious to divine the US central bank's next moves, fearing a faster pace of interest rate hikes could slow the world's largest economy just as a decade of recovery reaches its peak.

"The labor market has been strong and my colleagues and I... expect it to remain strong," Powell said in an address to the Economic Club of Chicago.

The Fed raised rates last month for the first time this year and plans to do so twice more by December. Wall Street has shown heightened sensitivity to the possibility the Fed could move a total of four times this year, however.

But economists say 2018 could be the year that gathering conditions -- a weak dollar, rising oil prices and simultaneous growth among the world's major economies -- could at last combine with falling unemployment, rising wages and steady job growth to spur rising inflation in the United States.

Still, the most closely watched measures of inflation have run below the Fed's two percent target for six years.

- Tariffs: 'too early to say' -

Hewing closely to prior Fed policy, Powell said Friday the central bank wanted to avoid raising rates either too quickly or too slowly -- the former could stunt growth while the latter could force the Fed to raise rates suddenly further down the line, jolting the economy.

"Our path of gradual rate increases is intended to balance these two risks," Powell said.

Powell also said the Fed's policy of ending a post-crisis stimulus program by allowing the central bank's nearly $4.5 trillion balance sheet of US Treasuries and government debt to wind down was going well.

"The balance sheet reduction process is going smoothly and is expected to contribute over time to a gradual tightening of financial conditions," he said.

In February Powell replaced former Chair Janet Yellen, who left office having won plaudits for her stewardship of an economic recovery that produced low inflation, steady job growth and calmly rising financial markets.

Powell is to the contrary settling to his new role amid stunning volatility on Wall Street, rising interest rates and fears of a trade war.

As he spoke, the White House doubled down on its threats to impose punishing tariffs on Chinese imports, sending Wall Street even lower.

Powell said following Friday's address that it was too early to say what effect the tariffs could have.

"People really don't see yet any implications in the near term because we don't know the extent to which the tariffs will come into effect," he said.

"It's really too early to say."