Fed's Powell sees 'no evidence' the US economy is overheating

Federal Reserve Chairman Jerome Powell sees no sign that US economy is building too much steam.The job market ...

Posted: Mar 2, 2018 7:17 AM
Updated: Mar 2, 2018 7:17 AM

Federal Reserve Chairman Jerome Powell sees no sign that US economy is building too much steam.

The job market is tight, but Powell isn't worried that wages are rising too quickly, which can lead to inflation. If anything, he's surprised wages haven't risen faster.

"There's no evidence that the US economy may be overheating," Powell said during a Senate Banking Committee hearing. The newly minted Fed chair made his second appearance on Capitol Hill this week to deliver the central bank's twice-a-year report on the state of the US economy.

Wage gains have been slow in the years since the Great Recession, which is one reason it hasn't felt much like a recovery to many people. Wages finally picked up in January, growing at the fastest pace in nine years.

Related: Fed's Powell says he's confident 'good years' are ahead for U.S. economy

"I'll be honest, I would have thought you'd seen more wages increase by this point," Powell said during the hearing. "And I do think you'll begin to see wage increases coming."

Fed officials have been patiently waiting for paychecks to grow. The challenge ahead for policymakers will be to stay one step ahead of price pressures.

"The thing we don't want to have happen is to get behind the curve of inflation and have to raise rates quickly and cause a recession," Powell told lawmakers.

The Fed has been trying to nudge inflation higher without risking a recession. It remains below 2%, the level the Fed considers healthy for the economy. Fed officials anticipate inflation will get closer to their target this year.

For years, when unemployment was higher, the risk of inflation was low - and not much of a worry for the Fed. Now that unemployment is historically low, central bankers have to be more careful about keeping it in check.

Related: Treasury secretary says we can get paid more and prices won't rise

Historically, the Fed has done a poor job of braking fast enough without causing an economic downturn.

That's why, for now, Powell believes the right course is for the Fed to raise rates gradually to help extend the nine-year economic expansion. The US central bank has penciled in three rate hikes in 2018.

"My expectation is that will continue to be the appropriate path as long as the economy performs this way," Powell said.

The Fed chair boosted his economic outlook earlier this week during a House Financial Services Committee. The rosy forecast caused investors to raise the odds the Fed may go further and raise rates four times this year.

The Fed holds its next interest-rate policy setting meeting later this month.

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