Fed's chairman reiterates gradual rate hikes to manage inflation

Source: Xinhua| 2018-10-03 15:34:54|Editor: xuxin
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WASHINGTON, Oct. 3 (Xinhua) -- Federal Reserve Chairman Jerome Powell reiterated on Tuesday that the Fed will keep raising interest rates steadily in order to manage the underlying inflation risks in U.S. economy.

Speaking at the 60th Annual Meeting of the National Association for Business Economics, Powell said the "historically rare pairing" of low inflation and low unemployment shows that U.S. economy remains in "extraordinary times."

"Since 1950, the U.S. economy has experienced periods of low, stable inflation and periods of very low unemployment, but never both for such an extended time as is seen in these forecasts," Powell said.

However, Powell noted such economic performance defies a classic economic model called the Phillips curve, which shows that inflation will rise when unemployment rate falls.

"The adoption in recent decades of inflation targets account for a good deal of the change in the Phillips curve relationship," Powell explained.

The central bank chairman added that many factors including better conduct of monetary policy over the past few decades have "greatly reduced, but not eliminated" the effects that tight labor markets have on inflation.

Given this abnormal unemployment-inflation relationship, Powell warned the favorable outlook is shadowed by multiple risks, such as inflation expectations losing their anchor, a tight labor market that might lead to higher inflation pressure, a natural rate of unemployment that could be even lower than current estimates, and many others.

"There are, of course, myriad other risks," he said, "to name just a few, we must consider the strength of economies abroad, the effects of ongoing trade disputes, and financial stability issues."

Powell reiterated the Fed's approach of raising short-term interest rates gradually as the best way to balance the risks.

"Removing accommodation too quickly could needlessly foreshorten the expansion, moving too slowly could risk rising inflation and inflation expectations," Powell said, "Our path of gradually removing accommodation, while closely monitoring the economy, is designed to balance these risks."

"Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation," Powell said.

The Fed raised its benchmark interest rate for the third time this year on Sept. 26 and made the target range between 2 percent and 2.25 percent. Fed policy makers also indicated another hike in December, three more in 2019 and probably one more in 2020.