Fed signals gradual rate hikes

Associated Press

WASHINGTON

The U.S. Federal Reserve will likely keep raising short-term interest rates at only a gradual pace, Fed chair Jerome Powell said Wednesday, partly because there are few signs, so far, that the ultra-low U.S. unemployment rate is pushing up inflation.

In a speech in Portugal, Powell said that with the unemployment rate at an 18-year low of 3.8 percent and inflation near the Fed’s 2 percent target, the case for continued gradual increases in rates “is strong.”

Still, Powell suggested that the Fed is unlikely to accelerate its increases out of concern that the low unemployment rate will lead to accelerated inflation. An ultra-low jobless rate in the past has at times pushed up inflation as companies raise prices so they can pay more to keep workers.

But Powell noted that the sharp drop in unemployment since the Great Reccession ended in 2009 has occurred “without much apparent reaction from inflation.”

Powell’s speech underscores that the Fed is struggling with the question of how low the unemployment rate can go before it becomes unsustainable and leads to much faster price increases. At a press conference last week, Powell confessed that the relatively slow wage gains in the U.S., even as the unemployment is so low, is “a puzzle.”

Powell’s remarks at a central banking forum come just a week after the Fed raised its benchmark short-term rate for the second time this year.