Powell Defends Fed’s Path on Interest Rates

Federal Reserve Chairman Jerome Powell issued a strong defense of the Federal Open Market Committee’s gradual path to normalizing interest rates today, emphasizing that this path addresses both the risk of acting too fast and choking off economic growth too soon and the risk of not tightening before inflation accelerates too quickly.

While the FOMC’s objective is to maintain 2 percent inflation and maximum employment, Powell noted that the measures historically used for both unemployment and consumer prices may not target these objectives adequately. “We therefore refer to many indicators when judging the degree of slack in the economy or the degree of accommodation in the current policy stance,” he said. “We are also aware that, over time, inflation has become much less responsive to changes in resource utilization.” Sound monetary management requires “looking beyond inflation for signs of excesses,” he explained.

Powell said that he is “confident that the FOMC would resolutely ‘do whatever it takes’ should inflation expectations drift materially up or down or should crisis again threaten,” and he added that “a decade of regulatory reforms and private-sector advances have greatly increased the strength and resilience of the financial system, with the aim of reducing the likelihood that the inevitable financial shocks will become crises.”