(Bloomberg) -- Federal Reserve Chairman Jerome Powell said a stronger outlook for the U.S. economy and for a pickup in inflation may prompt policy makers to review whether they need to raise interest rates more than the currently forecast three times this year.
“My personal outlook for the economy has strengthened since December,” Powell said in response to a question from Representative Carolyn Maloney, a New York Democrat, about what would cause the rate-setting Federal Open Market Committee to step up the pace of policy tightening.
“We’ve seen continuing strength in the labor market,” Powell told the House Financial Services Committee in his first testimony as Fed chief. “We’ve seen some data that will in my case add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative.”
Investors marked up the probability of a Fed rate hike in the fourth quarter to about 50 percent following Powell’s remarks. Odds of hikes in the second and third quarters ticked up to about 80 percent and 70 percent, respectively, while the odds of a hike when the Fed next meets in March remained near 100 percent.
Powell takes over the rate-setting FOMC at a time when the world’s largest economy may be shifting gear to faster growth and declining unemployment, though inflation remains below the central bank’s 2 percent goal. Adding to the momentum are tax cuts and spending increases agreed to by Republican lawmakers and signed by President Donald Trump.
When pressed on how such an improving assessment would affect the path of interest rates, Powell deferred to the FOMC’s upcoming meeting on March 20-21, saying he wouldn’t “want to prejudge” economic and rate-hike projections that will be drawn up for that gathering.
Plainspoken Powell
“It looks like the Powell Fed will be quicker to react and more plainspoken,” said Julia Coronado, founder of Macropolicy Perspectives LLC in New York. Even though Powell said a decision on a faster path hasn’t been made, he followed that response by noting “four factors that all suggested tighter monetary policy was appropriate.”
Powell’s remarks caused yields on U.S. 10-year notes to jump to their highest levels of the day as they touched 2.91 percent after closing at 2.86 percent Monday. Stocks slipped into losses, with the S&P 500 Index down 0.4 percent at 11:53 a.m.
The Fed chairman’s written remarks before the House Financial Services Committee were also positive on the outlook for growth. He said “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds.”
He said monetary policy will try to strike a balance between “avoiding an overheated economy” and bringing inflation back to 2 percent on a sustained basis.
The recent correction in the stock market and rising rates on U.S. government debt shouldn’t hamper growth, he said.
“We do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and inflation,’’ Powell said in his opening remarks. “Indeed, the economic outlook remains strong.’’
Powell repeated the FOMC’s January message, saying “further gradual increases’’ in the Fed’s policy rate “will best promote’’ the attainment of the central bank’s objectives of maximum employment and stable prices.
“He is optimistic,” said Ward McCarthy, chief financial economist at Jefferies LLC. “He is sending a clear message: The economy is back to normal and we have to get policy back to normal.”
The central bank has been struggling with too low inflation. The personal consumption expenditures price index has been below the central bank’s 2 percent target for most of the past five years.
Powell said in his written remarks that the lag in wages during the expansion was due to low gains in output per hour, or productivity, though a new wave of investment spending “should support higher productivity growth in time.’’
“Wages should increase at a faster pace as well,’’ he said, adding that the FOMC continued to view the shortfall in inflation last year “as likely reflecting transitory influences that we do not expect will repeat.’’