Powell says strong economy will keep rate hikes coming

WASHINGTON — Federal Reserve Chairman Jerome Powell told lawmakers Tuesday that strong economic growth will keep the central bank on a path to gradually raise interest rates. But he noted that President Donald Trump's get-tough trade policies run the risk of dampening future growth if they lead to permanently higher tariffs.

Delivering his twice-a-year report on monetary policy to Congress, Powell gave an upbeat assessment of the economy's prospects. He said the economy's performance has enabled the Fed to dial back the "extra boost" it began implementing a decade ago to help the lift the economy out of the Great Recession.

The Fed's plan for raising rates slowly is "running smoothly," Powell said. And the central bank expects the job market will remain robust and inflation will hover near the Fed's 2 percent target over the next several years.

"Our policies reflect the strong performance of the economy and are intended to help make sure that this trend continues," Powell said before the Senate Banking Committee.

Private economists said that Powell's remarks sent a clear signal that the Fed, which has already boosted rates twice this year, expects to remain on its current projected path of raising rates another two times this year.

"Although trade tensions remain a downside risk, we continue to expect strong activity growth and rising inflation to prompt the Fed to raise interest rates in September and December and twice more in early 2019," said Andrew Hunter, U.S. economist at Capital Economics.

Powell faced a number of questions on trade, with both Democratic and Republican senators seeking criticism of the Trump administration's policies of imposing punitive tariffs on billions of dollars in foreign imports. The moves so far have triggered retaliation in China and other nations slapping retaliatory tariffs on U.S. goods.

Sens. Jon Tester of Montana and Heidi Heitkamp of North Dakota, two Democrats up for re-election this year in states Trump carried, were highly critical of the tariffs.

"We can't afford to put our heads in the sand and ignore the impact of the president's policies on our economy," Heitkamp said.

Republican Sen. Pat Toomey of Pennsylvania noted that Fed officials had reported a growing number of business contacts cutting back on investment spending because of growing uncertainty about trade.

At first, Powell sought to avoid directly answering a question of the possible impact of Trump's approach to trade by saying trade was not an issue the Fed could control. But when pressed, he said that if Trump's effort "results in lower tariffs for everyone, that would be a good thing. If it results in higher tariffs, that would be bad for our economy."

The Fed chairman cited trade and fiscal policy, including last year's big tax cut, as among the uncertainties that could alter the Fed's economic forecast.

It is "difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy," he said.

Powell also faced sharp questioning from some Democrats over the Fed's approach to bank regulations. Sen. Elizabeth Warren, D-Mass., accused the Fed of loosening important rules needed to prevent risky behavior that could trigger a new financial crisis.

"It looks to me like the Fed is heading in the wrong direction," Warren told Powell.

But he disagreed, saying the annual stress tests to determine if the nation's biggest banks could survive a severe recession were tougher than ever.

After the 2008 financial crisis, the Fed kept its key policy rate at a record low near zero for seven years before starting a slow process of boosting rates in December 2015.

It raised rates once in 2015, once in 2016 and then three times last year as the economy has begun to gain momentum. This year's rate hikes, which occurred in March and June, have left the Fed's key rate in a range of 1.75 percent to 2 percent.

Powell, who joined the Fed in 2012 as a board member, succeeded Janet Yellen as chairman in February after Trump decided not to offer Yellen a second term.