Fed chair signals pause in rate cuts

United States Federal Reserve Chairman Jerome Powell expects the United States economy to continue growing at a solid pace, though it still faces risks from slower growth overseas and trade tensions.

Powell also said the Fed is likely to keep its benchmark short-term interest rate unchanged in the coming months, unless the economy slows enough to cause Fed policymakers to make a “material reassessment” of their outlook.

“Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labour market, and inflation near our symmetric two per cent objective as most likely,” Powell said in a written statement he will deliver to the Joint Economic Committee later Wednesday.

The Fed cut short-term rates last month for the third time this year, to a range of 1.5 per cent to 1.75 per cent.

Powell and other Fed officials argue that their rate cuts, by lowering borrowing costs on mortgages and other loans, have spurred home sales and boosted the economy.

Recent data suggests that growth remains solid if not spectacular. The economy expanded at a 1.9 per cent annual rate in the July-September quarter, down from 3.1 per cent in the first three months of the year. The unemployment rate is near a 50-year low of 3.6 per cent, and hiring is strong enough to potentially push the rate even lower.

Inflation, according to the Fed’s preferred gauge, is just 1.3 per cent, though it has been held down in recent months by lower energy costs, and most Fed officials expect it to move higher in the coming months.

Powell on Wednesday also urged Congress to lower the federal budget deficit so that lawmakers would have more flexibility to cut taxes or boost spending to counter a future recession.

“The federal budget is on an unsustainable path, with high and rising debt,” Powell said. “Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”

Other Fed officials have voiced similar concerns. Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said Tuesday that the large deficit, and the constraints it imposes on Congress in the event of a recession, “is one of the things I do lose sleep over”.

Powell’s testimony comes after many Fed officials in the past two weeks have voiced support for the Fed’s recent moves and expressed confidence in the economy. That contrasts with the Fed’s previous meetings when as many as three officials dissented.

AP