April 8, 2015 / 12:09 PM / in 3 years

Powell, citing crisis damage, says rate hikes to proceed gradually after liftoff

WASHINGTON (Reuters) - Federal Reserve Governor Jerome Powell said on Wednesday he would be willing to start raising U.S. interest rates even at current low levels of inflation, but said the central bank should proceed slowly from then on to ensure continued recovery from the crisis.

“You cannot wait until you see the goalposts coming because monetary policy works with these long lags,” Powell said, adding that the Fed would have the door open for a rate hike as early as June, and could proceed then if economic data over the next two months indicate the recovery is on track.

“By the time of the June meeting we will have had...a lot more incoming data on just about everything in the economy. June is a different world than today,” Powell said. “I don’t think we need to be in a hurry,” he said, but “you have to start well before you actually hit the goal.”

Even as he agreed there was still slack in the labor market that should make the Fed cautious, he also joined an effort by top Fed officials to throw attention away from the date of the first hike, whether it be June or later in the year, and on to the pace of tightening to follow.

“We are getting to the point where zero is not going to be the right rate,” Powell said, but “from a macroeconomic perspective, the precise timing of liftoff is less important than the path of subsequent additional rate increases.”

While the first hike will breach a post-crisis psychological barrier, policymakers note rates will remain near historic lows, potentially for years.

Inflation is lagging due to what Powell described as temporary factors like the drop in oil prices, and he said a rise to the Fed’s two percent target in coming months “is not that big of a stretch.”

Many Fed officials, Powell included, agree there are pockets of slack in the economy - the number of part-time workers remains high, for example. However, Powell also noted that it is difficult in the wake of a crisis to determine how much of that is the result of permanent damage.

If lost production, low investment and underused labor are permanent scars, Powell said, then for the Fed’s purposes the economy may be nearing a point where monetary policy cannot do much more good.

Reporting by Howard Schneider; Additional reporting by Daniel Bases in New York and Michael Flaherty in Washington; Editing by Chizu Nomiyama

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