Fed’s Powell Acknowledges Challenges of Raising Rates Amidst Cuts by Others

Federal Reserve Governor Jerome Powell has expressed concerns that the U.S. economy may risk slipping into a prolonged period of subdued growth, necessitating lower interest rates than previously anticipated. In a recent interview, Powell emphasized the importance of taking a “very gradual” approach to any potential increases in interest rates, citing risks stemming from the global economic landscape.

He noted that with inflation currently below target levels, the Federal Reserve has the latitude to remain patient with its monetary policy. “The probability of an era of weaker growth, lower potential growth, for a longer period of time – that worries me more than it used to,” Powell stated.

While Powell acknowledged that the U.S. economy isn’t overwhelmed by risks internally, he pointed out that there are numerous external factors that could potentially impact it. “If you look around the world, there are just a lot of risks that could affect us,” he explained. He characterized the current state of the U.S. economy as being relatively consistent with trends observed over the past seven years, but noted that the risks from the global economy appear to lean towards the downside.

Powell candidly discussed the challenges the Fed faces in normalizing its policies given the global economic outlook and the fact that other central banks are easing their policies. He remarked that raising rates can be particularly difficult “in a world where everyone else is cutting and demand is weak around the world,” and acknowledged that the economic climate since 2014 has constrained growth.

To consider tightening policy, Powell indicated that he would look for strong growth in employment and demand, inflation approaching the 2% target, and a lack of evident risks.

In light of recent job data, the probability of an interest rate increase in September has risen to 15%, up from 9%, with December’s likelihood increasing to 43.4% from 32.1%. However, it is suggested that actual movement in rates is unlikely until May 2017.

Additionally, both the Atlanta and New York Federal Reserve banks have revised their forecasts for third-quarter gross domestic product (GDP) upwards, following the release of the July employment report, increasing their estimates from 2.5% to 2.6%, respectively.