Is Federal Reserve Chairman Jerome Powell tempering his campaign to raise short-term interest rates? That was the market’s upbeat takeaway from his testimony on Capitol Hill Tuesday.
Appearing before the Senate Banking Committee, Powell spoke of the Fed’s intention to “keep gradually raising the federal funds rate,” the benchmark rate that the central bank controls. Then he added a caveat: “for now.”
The stock market rose on the news, with the S&P 500 closing the day up 0.4%.
In some quarters, there’s a fear that the Fed will raise rates too much, thus touching off a recession. While unemployment is low and economic growth is steaming along, threats like a possible trade war could ruin things.
For that reason, some are urging the Fed to take a break from its seemingly relentless push for higher short-term rates. Powell wants to tamp down any possible inflation and also give the body room to cut again if the economy weakens.
Since late 2015, the Fed’s policymaking committee has hiked the rate seven times, including two times this year. Committee members indicated that they are split over whether there will be one or two more hikes in 2018. The range for the rate now is 1.75% to 2%.
Right now, the Fed appears to believe that the “neutral rate,” where the level neither supports nor slows the economy, is around 3%. That implies four more increases of a quarter percentage point each, which is the pace the Fed has adopted in the current tightening cycle.