In a speech on Tuesday, Fed Governor Powell concentrated on longer-term issues surrounding the US economy, monetary policy and the structural decline in equilibrium interest rates.
This is territory explored by other Fed members and by global central banks over the past few months with Powell also advocating measures to boost productivity.
Powell reiterated that it was important for inflation to increase towards the 2% level to boost public confidence in the target and maintain inflation expectations.
There were also interesting comments on the unemployment level that would represent full employment. Although there is no numerical goal for maximum employment, he also commented that the Fed participants write down their estimates of the longer-term normal level of the unemployment rate four times per year. At the September FOMC meeting, the median estimate was 4.8%, very close to the current unemployment rate of 4.9%.
He stated that incoming data showed the economy growing at a healthy pace with solid payroll growth and inflation gradually moving up to 2%. In Powell’s view, the case for an increase in the Federal Funds rate has clearly improved since the previous meeting in November. The patience showed in raising rates had paid dividends, but moving too slowly could eventually mean that the committee would have to raise rates abruptly to avoid overshooting its goals.
The comments overall are as strong as FOMC members are likely to get that rates will be increased at the December meeting. This increase, however, has already been priced in by markets and the main focus will be on the potential for forward-looking commentary on the 2017 outlook. The Fed is unlikely to make substantive comments on next year’s outlook at this stage.
The dollar tended to drift lower after the comments on on-going position adjustment rather than the speech’s content. USD/JPY edged lower to 112.50 while Treasuries had already recovered to near unchanged on the day as equity markets remained slightly higher.