Federal Reserve

Powell says we're 'a long way' from neutral on interest rates, indicating more hikes are coming

Key Points
  • Federal Reserve Chairman Jerome Powell said the central bank is "a long way" from getting rates to neutral, a fresh sign that he believes more hikes are coming.
  • The Fed's ultra-accommodative policy to bring the economy out of the Great Recession is no longer needed, he added.
  • The euro hit its highest level since Aug. 21 during Powell's comments.

Federal Reserve Chairman Jerome Powell said the central bank has a ways to go yet before it gets interest rates to where they are neither restrictive nor accommodative.

In a question-and-answer session Wednesday with Judy Woodruff of PBS, Powell said the Fed no longer needs the policies that were in place that pulled the economy out of the financial crisis malaise.

"The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don't need those anymore. They're not appropriate anymore," Powell said.

"Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral," he added. "We may go past neutral, but we're a long way from neutral at this point, probably."

The question of the neutral rate is critical for the Fed's policymaking. Officials have been debating for years where that level may be, with the Fed consensus near 3 percent. The current range for the central bank's benchmark rate is 2 percent to 2.25 percent; projections released last week indicated the policymaking Federal Open Market Committee is likely to take the funds rate to 3.4 percent before pausing.

During the interview, the euro dropped to its lowest level since Aug. 21 as investors saw Powell's remarks as affirmation of more rate hikes down the road.

Government bonds were getting slammed in early market action Thursday, responding both to Powell's comments and stronger economic data.

The 10-year U.S. Treasury note's yield jumped to 3.21 percent, its highest level in seven years.

Powell spoke on a number of issues as well:

'Rising chorus' of trade concerns

While he said the trade war in which the U.S. finds itself with a number of its partners is not having an impact on data, the Fed has heard plenty from its business contacts who are concerned about multiple issues.

Rising materials costs, supply chains and the loss of markets are among the worries.

However, Powell said the end result could be positive both for the U.S. and other economies around the world.

"If we wind up with lower tariffs broadly speaking and people obeying the rules of global trade, then that will be good for us it will be good for other countries, too," he said. "If perhaps inadvertently we wind up instead in a more protectionist era where countries are putting tariffs back and forth on each other, that will be bad for American workers and the American economy and perhaps for other countries as well."

On his relationship with Trump

President Donald Trump has been a critic of Fed policy, though he appointed Powell to his leadership role. The president is worried that the Fed's consistent rate hikes will interfere with economic growth.

However, Powell said neither he nor other Fed officials are letting the politics bother them.

"My focus is essentially on controlling the uncontrollable. We control what do," he said to laughter from the audience. "To anybody who has known our situation over time, this is just who we are and who we will always be."

Asked whether he has spoken with Trump since the president made his remarks, Powell said, "No."

On the next crisis

Asked what keeps him up at night, Powell said "basically everything."

"Nobody wants a central banker who sleeps well, right? What good is that?" he said.

However, he said that he thinks the next crisis will not be the same as the financial system meltdown in 2008 that caused the Fed to take its benchmark rate to near-zero and to buy nearly $4 trillion of bonds.

"My guess is the next set of problems we have won't look a lot like the last set of problems we had," he said. "It will be something else, a cyber attack, some type of global event."

"We don't see the kind of buildup in risks in the financial markets, let alone the banking system," Powell added.

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