Economy needs to tighten up before rates can rise: Fed's Powell

LONDON Fri Jun 6, 2014 6:26am EDT

Federal Reserve Board of Governors member Jerome Powell listens during an open board meeting at the Federal Reserve in Washington December 14, 2012. REUTERS/Kevin Lamarque

Federal Reserve Board of Governors member Jerome Powell listens during an open board meeting at the Federal Reserve in Washington December 14, 2012.

Credit: Reuters/Kevin Lamarque

LONDON (Reuters) - Federal Reserve Governor Jerome Powell said on Friday that he wanted to see signs that the U.S. economy was tightening up before before interest rates could be raised.

While acknowledging that employment in the United States had rebounded, Powell highlighted "significant" slack, referring to unemployed or underutilised workers.

The Fed hopes to end its stimulus programme for the U.S. economy by the end of the year, clearing the way for it to eventually raise interest rates.

"I’m looking for some sign the economy is getting tight before we can start thinking about raising rates," Powell said at an event in London.

Powell added there was a "significant amount of slack in the labour market" in the United States at present.

In brief prepared remarks, Powell said the Fed's evolving statements about the future path for rates have played an important role in shaping market expectations about U.S. monetary policy.

With the overnight federal funds rate stuck near zero for years, he said the management of expectations has been important in allowing investors to buy and sell bonds with confidence that rates would not unexpectedly increase.

That, for example, has lowered the premium charged for longer-term loans, and helped tamp down volatility as well, Powell said.

"Forward guidance has generally been effective in providing support for the economy at a time when the federal funds rate has been pinned at its effective lower bound," said Powell, who is awaiting Senate confirmation to a new 14-year term on the Fed board.

Powell added that markets were "well aligned" with the guidance the central bank has offered about the likelihood that its asset-buying programme will be stopped by the end of the year.

(Additional reporting by Howard Schneider in Washington; Editing by Hugh Lawson)

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Comments (2)
nose2066 wrote:
The problem here is that the Federal Reserve officials equate “low cost borrowing” with “stimulating the economy”. Corporate America has borrowed heavily, not to expand production in America, but to buy back shares.

Of course many American companies are modernizing their production facilities – in China and in other low wage countries. And they borrow the money for that foreign expansion from wherever they can get “low cost borrowing” – like in the U.S. bond market.

This is becoming more and more like the old Soviet Union Central Planning commitee. The Federal Reserve keeps doing what they have been doing even though there is less and less connection to the real economy.

Jun 06, 2014 11:21am EDT  --  Report as abuse
minipaws wrote:
You can cheat some of the people some of the time but not all of the people all of the time. End the Fed, vote Libertarian. End the Fed’s power, move your money to Credit Unions.

Jun 08, 2014 6:51am EDT  --  Report as abuse
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