The first rate hike by the Federal Open Market Committee could come at its June meeting, Fed Governor Jerome H. Powell said Wednesday, noting there must be confidence inflation will rise toward the 2% target in the medium term.
"I expect that economic conditions will support the first rate increase later this year," Powell said in a speech in New York, according to prepared text released by the Fed. "I do not expect that such an increase or the associated market reaction will materially restrain the progress of the economy."
"Such an increase could come as soon as the June FOMC meeting," he said.
Terming the recovery "frustratingly slow" at points, but "now well advanced," Powell said some measures show "room for improvement." He noted, "Assessing the scope for further improvement will be important in judging the appropriate path for monetary policy."
Since monetary policy works with a lag, Powell noted, "rate increases need to begin well before we reach" stable prices and maximum employment.
Despite its recent slowness, the labor market has shown a "great deal of progress," which Powell expects to continue. "But the unemployment rate probably understates the amount of slack still remaining in the labor market." Labor force participation "continues to be unusually low," with some waiting "for further improvements in job opportunities and wages," and many with part-time jobs want to be working full time. "The low level of wage increases also suggests additional slack."
Low oil prices and the appreciation of the dollar have pushed inflation down to about 1.4% at the core from the 1.5% rate at which it was running. Powell said when these "transient shocks" are lifted, inflation will return to that level and gradual rise toward the 2% target.
While liftoff may occur in June, Powell said, "the precise timing of liftoff is less important than the path of subsequent additional rate increases. My view is that, if the economy continues on its expected path, it will be appropriate for a time to increase rates fairly gradually." He held out the possibility the pace will change if the economy doesn't react as expected.
"There is no risk-free path for monetary policy," Powell noted. Tightening too early or too fast could result in the need for "the central bank to reverse course. The record of central banks lifting off from the zero lower bound suggests caution in this regard. A second risk is that we could prematurely truncate the process of healing damage from the crisis, thereby ensuring that the admittedly severe cyclical effects become permanent."
But remaining overly accommodative for too long could cause the economy to "overheat," and rate hikes to be "faster, which--if overdone--could produce a damaging recession." But, Powell said he's more worried that "more-accommodative policy could lead to frothy financial conditions and eventually undermine financial stability. While I do not see a troubling buildup of these risks today, tighter monetary policy might eventually be necessary if such risks do appear."
