Investing.com – Federal Reserve (Fed) governor Jerome Powell warned that the U.S. economy ran the risk of becoming trapped in a prolonged period of subdued growth that required lower rates than was previously expected, according to an interview released on Monday.
Powell reiterated that any increases to interest rates should be “very gradual” in light of the risks emanating from the global economy and emphasized that the fact that inflation was below target would allow the Fed to be patient.
“The probability of an era of weaker growth, lower potential growth, for a longer period of time – that worries me more than it used to,” Powell told the Financial Times (FT).
Powell admitted that the U.S. economy itself was not full of risks.
“The issue is that if you look around the world there are just a lot of risks that could affect us,” he explained.
“So it is a U.S. economy that is probably pretty close to its pattern of the last seven years, but the risks to us from the global economy are to the downside,” Powell added.
Powell spoke frankly of the difficulty for the Fed in returning to policy normalization given the global outlook with other central banks easing their own policy.
He admitted it was difficult to raise rates “in a world where everyone else is cutting and demand is weak around the world” and said that the big move up in the dollar since 2014 has restrained growth.
Powell said that, in order to consider policy tightening, he would look for strong growth in employment and demand, inflation returning towards the 2% target and an absence of obvious risks.
According to the FT, the interview was from last Thursday, ahead of Friday’s better-than-expected jobs report stateside that caused markets to increase the odds of a Fed rate hike this year, though a move still wasn’t expected until well into 2017.
Specifically, the chance for an increase in September edged up to 15% after the jobs data, from the prior day’s 9%, while the probability for a move in December was raised to 43.4%, from the previous 32.1%. The odds do not pass the 50% threshold until the May 2017 decision.
Both the Atlanta and New York Fed increased their forecasts for third quarter gross domestic product (GDP) on Friday after the publication of the July employment report from 3.7% to 3.8% and from 2.5% to 2.6%, respectively.