Federal Reserve Chairman Jerome Powell on Friday defended the central bank's plans to gradually hike interest rates, citing the strength of the USA economy and new uncertainty about how it operates. But then-Fed chairman Alan Greenspan resisted calls for higher rates and inflation remained much lower than monetary hawks predicted. Most market watchers expect the central bank to lift rates two more times in 2018.
"I see the current path of gradually raising interest rates as the FOMC's approach to taking seriously both of these risks", Powell said. "Inflation is near our two per cent objective and most people who want a job are finding one. We are setting policy to do what monetary policy can do to support continued growth, a strong labor market and inflation near 2 percent".
On the economic front, U.S. new orders for manufactured durable goods in July decreased $4.3 billion or 1.7 per cent to $246.9 billion, worse than market consensus, said the Commerce Department on Friday. That echoed a phrase that was used to describe the extraordinary steps the Fed and other central banks took after the 2008 financial crisis plunged the US and global economies into deep recessions.
His words reinforcing the Fed's plan to gradually raise rates seemed to have reassured investors.
On Wall Street, the Dow Jones Industrial Average rose 133.37 points, or 0.52 percent, to 25,790.35.
Speaking just days after President Donald Trump criticised the U.S. central bank's rate hikes, Mr Powell used an annual research symposium here to "explain today why my colleagues and I believe that this gradual process. remains appropriate". The president has complained that the Fed's tightening of credit could threaten the continued strong growth he aims to achieve through the tax cuts enacted late a year ago, a pullback of regulations and a rewriting of trade deals to better serve the United States. But lately the yield curve has been flattening and could be in danger of inverting with more Federal Reserve rate hikes. On Thursday, two top Fed officials made clear Thursday that Trump's criticism won't affect their decisions on whether to continue raising rates.
Strong economic growth and earnings and low interest rates have combined to continue to move the US equity market higher, said Leo Grohowski, chief investment officer for BNY Mellon Wealth Management.
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Under chairs Ben Bernanke and Janet Yellen, the case for holding off on rate hikes was simple as the unemployment rate declined from a devastating peak of 10 percent in 2009 with an economy still scarred by the financial crisis.
"Overall, his speech did not signal any change in policy", Michael Pearce, senior US economist at Capital Economics, wrote in a note.
But in the face of a strengthening USA economy, investors were watching Powell closely on Friday morning to see whether he would address any political developments - like an worldwide trade war between the US and its traditional economic partners.
Trump expected Powell to be a "cheap-money" Fed chair, according to a Bloomberg report on the event.
In particular, we now know that the level of the unemployment rate relative to our real-time estimate of u* will sometimes be a misleading indicator of the state of the economy or of future inflation.
Powell's comments were not a direct response to Trump's criticism that he is "not thrilled" with the Fed raising rates as he is trying to stimulate economic growth.
The Fed's economic projections, compiled from estimates of all Fed officials, estimates the current neutral rate at 2.9 per cent. Powell defended the approach, noting "when unsure of the potency of a medicine, start with a somewhat smaller dose". "Fed policy should not have anything to do with politics", said Schoar, who is also attending the Jackson Hole conference.