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Fed chairman expects rate hikes to continue

Jerome Powell

Federal Reserve Chairman Jerome Powell was optimistic in his economic assessment on Tuesday and told the Senate Banking Committee he expects the Fed to continue to gradually raise interest rates, at least "for now."

Mr. Powell cited low unemployment and inflation close to its 2% objective level as reasons for being positive. Those were two key reasons the central bank last month raised the federal funds rate for the second time in 2018, this time to a range of 1.75% to 2%.

"We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses," Mr. Powell said Tuesday during the Fed's semiannual Monetary Policy Report to Congress. "On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective."

Matt Toms, chief investment officer of fixed income for Voya Investment Management, reacting to Mr. Powell's statements, said he is expecting two more quarterly rate increases this year and for the Fed to move to a semiannual rate hike pace in 2019.

Mr. Toms said he's not concerned with Fed policy in the near term because the market "can tolerate the next two hikes."

"But if we're wrong and the Fed is more persistent in 2019, we would think that they would increase the risk of a late 2019-early 2020 recession," he added.

The uncertainty surrounding trade policy, which Federal Open Markets Committee members discussed in June and said "could have negative effects on business sentiment and investment spending," according to meeting minutes, was brought up by Sen. Jon Tester, D-Mont.

Mr. Powell said he would not comment on any particular policy, but that in principle open trading is good and the Fed does not want tariffs to be a barrier to trade — "in both directions."

"But the thing is we don't know how this goes," Mr. Powell said. "The administration says it's going for broadly lower tariffs, if that happens, that's good for the economy … our economy and others' too, by the way. On the other hand if we wind up with higher tariffs, then (that's) not so good."

Mr. Powell will testify on Wednesday before the House Financial Services Committee.