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Fed Expects Gains to Prompt Rate Hikes 02/24 10:37

   The Federal Reserve says it expects that the ongoing strength of the U.S. 
economy will warrant gradual increases in interest rates this year, delivering 
the same steady-as-it-goes message under new leader Jerome Powell as it had 
provided under Janet Yellen.

   WASHINGTON (AP) -- The Federal Reserve says it expects that the ongoing 
strength of the U.S. economy will warrant gradual increases in interest rates 
this year, delivering the same steady-as-it-goes message under new leader 
Jerome Powell as it had provided under Janet Yellen.

   The Fed's projection on rate hikes came with the release Friday of its 
semi-annual monetary report to Congress. Powell will testify on the report 
before the House Financial Services Committee on Tuesday, making his first 
public appearance since taking over as chairman earlier this month.

   The report stated that the Fed expects steady economic gains will warrant 
"further gradual increases" in the Fed's benchmark rate. But it said the rate 
was likely to remain low enough to stimulate the economy over the next two 
years.

   Separately, Loretta Mester, president of the Fed's Cleveland regional bank, 
suggested that the central bank should embark this year on a review of its 
operating strategies. The Fed seeks to manage interest rates to promote maximum 
employment and stable prices, which it defines as inflation rising at an annual 
rate of 2 percent.

   "After coming through the financial crisis and Great Recession, the economy 
has returned to normal and monetary policy ... is normalizing," Mester said in 
remarks to a conference in New York sponsored by the University of Chicago 
Booth School of Business. "This suggests to me that it may be appropriate later 
this year to begin an assessment of our current monetary policy framework and 
alternatives."

   The comments by Mester, whose name has been mentioned as a possible 
candidate to be the Fed's next vice chairman, come as various private 
economists have also suggested that now might be a good time to review how the 
Fed seeks to achieve its policy goals.

   Sal Guatieri, senior economist at BMO Capital Markets, said Friday's 
monetary report was "in line with further gradual rate hikes" although he said 
various sections could be read to support either an expected three hikes or 
possibly four hikes this year.

   He said that comments in the report that noted that the labor market was 
"near or a little beyond" full employment could be a signal that the Fed will 
boost rates four times this year. But other comments that wage growth remains 
"moderate" could be cited to support the view that the Fed was sticking with 
its December projection for three rate hikes, he noted.

   Chris Rupkey, chief financial economist at MUFG Union Bank in New York, said 
he believes the overall tone in the report was a signal the central bank under 
Powell is prepared to accelerate rate hikes to four this year.

   "The Fed is inching closer to our call for them to raise interest rates four 
times this year as the worry over low inflation has been moved to the back 
burner," Rupkey said.

   The Fed's key policy rate is currently in a range of 1.25 percent to 1.5 
percent. The Fed raised rates three times last year with the last hike 
occurring in December. The Fed had pushed the rate to a record low near zero in 
December 2008 as it struggled to contain a severe financial crisis and the 
deepest economic downturn since the Great Recession of the 1930s.

   It kept the rate unchanged for seven years until December 2015 and since 
that time has boosted the rate in five tiny quarter-point moves, including 
three rate hikes last year.

   At the December meeting, Fed officials signaled that they expected to raise 
rates another three times in 2018.

   However, investors have grown concerned that signs of rising wage and 
inflation pressures might prompt it to speed up the rate hikes.

   Those fears were one of the factors leading to a series of stomach-churning 
days in the stock market earlier this month, a sell-off that began after the 
Labor Department reported that wage gains had accelerated in January.

   The policy report released Friday noted that stock prices had declined after 
hitting record highs in January. It partially attributed the strong stock gains 
last year and into January to investor anticipation of a boost to after-tax 
earnings from corporate tax cuts that were included in the tax bill Congress 
passed in December.

   The report noted that even with the sell-off in recent weeks, the valuation 
of stocks, judged by the stock price related to company earnings, remained near 
the highest levels seen since the late 1990s.

   Many economists now believe the Fed will end up raising rates four times 
this year, with the first hike likely to come in March, which will be Powell's 
first monetary-policy meeting as chairman. Yellen presided at the January 
meeting, which occurred before the market turmoil, and the Fed left rates 
unchanged.

   However, minutes of that meeting released Wednesday indicated that Fed 
officials in their two days of discussions expressed the view that prospects 
for the global economy were brightening. The development, combined with the 
stimulus expected from the U.S. tax cuts passed in December, had raised 
prospects for solid growth in 2018 and further interest rate increases.


(KA)

 
 
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