Powell Says Strong Economy Faces Headwinds as Fed Weighs Policy

© Bloomberg. Jerome Powell Photographer: Andrew Harrer/Bloomberg

(Bloomberg) -- Federal Reserve Chairman Jerome Powell said the U.S. economy is strong but could face headwinds next year as policy makers weigh how far and fast to raise interest rates.

“We have to be thinking about how much further to raise rates, and the pace at which we will raise rates,” Powell said during a question and answers session Wednesday in Dallas moderated by Dallas Fed chief Robert Kaplan. The goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.”

While generally upbeat about the U.S. economic outlook, Powell listed potential challenges including slowing growth abroad, fading fiscal stimulus and the lagged effect on the economy of the Fed’s eight rate increases since late 2015.

“These are things we are well aware of though. We know that when we’re making policy and we think about those and kind of have a sense of what they might be,” he said.

The chairman’s comments highlight the growing complexity the Fed faces as it sets policy. The central bank’s rate increases are starting to bind on some segments of the economy such as housing, and financial conditions are tightening. But the jobs market remains red-hot and inflation is at the Fed’s 2 percent target.

Treasuries were unchanged as trading began in Asia, with yields suggesting Powell didn’t alter investor expectations. Ten-year yields were at 3.12 percent as of 9:28 a.m. in Tokyo. S&P 500 futures dipped 0.1 percent, indicating the past week’s slide in equities has further to go.

The U.S. expanded at a 3.5 percent annual pace in the third quarter on the back of strong consumer spending, which has in turn been fueled by the lowest unemployment rate since 1969.

“I do believe our economy can grow and grow faster,” Powell said.

U.S. central bankers are pursuing a policy of gradualism, with three interest-rate increases so far this year and a fourth penciled in for next month. The campaign has attracted the ire of President Donald Trump, who’s attacked the Fed for raising rates.

“We are absolutely committed to serving the public in a non-partisan, professional way, in a way that communicates what we’re doing and why we’re doing it as clearly as possible” Powell said.

He played down recent turbulence in the stock market. Though U.S. equity prices suffered their steepest loss last month since 2011, Powell said equity price moves were only one of many factors that the Fed takes into account.

The Fed chairman said officials are “looking really carefully” at how financial markets, the economy and business contacts are responding to rising rates.

‘Nimble’ Policy

“One of the key things he has done is try to shift away from the forecast and forward guidance,” said Michael Hanson, chief US macro strategist at TD Securities USA. He “is trying to be nimble as the data come in.”

The chairman also stressed that his move to press conferences following all eight of the Fed’s meetings in 2019 will help policy agility, and get financial markets away from the idea that the Fed only has the potential to change policy four times a year, lining up with the current press conference cycle.

"The markets definitely got in the habit of having us only move on press conference meetings,” Powell said. “Over time the market’s going to have to get used to that.”

(Updates with Powell comments in final four paragraphs.)