Federal Reserve Chairman Jerome Powell declined to reveal Feb. 27 whether the Fed might raise interest rates faster than it has previously signaled, though he said his "personal outlook for the economy has strengthened."
Powell was asked several times in the House Financial Services Committee how recent developments — such as tax cuts, a new spending deal in Congress and signs that wage growth is strengthening — might affect the Federal Open Market Committee's deliberations on monetary policy.
Fed officials signaled in December that they would raise interest rates three times in 2018, and Powell said he did not want to get ahead of their next round of projections in March.
"I wouldn't want to prejudge that new set of projections," Powell said while testifying on the Fed's semiannual monetary policy report.
He said in prepared remarks, released ahead of the hearing, that Fed officials think further gradual rate increases are needed and the Fed will watch out for any possible overheating in the economy as it tries to get inflation back to its 2% goal.
Democrats and Republicans battled over whether the recent tax overhaul would help boost the economy, with Dems saying many companies have chosen to buy back shares instead of helping their workers and GOP members noting the wave of bonuses and wage increases companies have announced.
But Powell declined to take a firm stance on the debate, saying it is "very hard to trace" the effects of tax reform on wage growth early on. He said, though, that wages could increase in the longer term if companies invest more money in the U.S. and boost lagging productivity levels, which he said would be "very welcome."
He also declined to delve into detailed responses on fiscal policy debates in Congress, saying the Fed's job is to focus on monetary policy. But he sounded the alarm on longer-term fiscal challenges the country will face as more people retire and the demand for government-funded services increases.
And he said he "would really hate to see" the country default on debt payments by not raising the debt limit in the future, warning doing so would bring significant consequences.
"We really need to get on a sustainable fiscal path," Powell said. "The time to really be doing that is now."
Powell says balance sheet reductions going smoothly, pace unlikely to change
The Fed late last year began gradually trimming a balance sheet that peaked at $4.5 trillion, as the Fed stocked up on Treasurys and mortgage-backed securities after the crisis to try to push down long-term rates. Powell reiterated he sees the balance sheet ending up at somewhere between $2.5 trillion and $3 trillion, with the reductions happening gradually in the coming months to avoid market disturbances.
Rep. Andy Barr, R-Ky., asked whether the Fed would consider quickening the pace of the roll-offs to try to push up long-term yields and avoid a possible inversion in the yield curve, which has flattened as the Fed has increased short-term rates.
The reductions, Powell responded, were "carefully planned and carefully rolled out," adding he has "little inclination" to change the parameters the central bank laid out.
Powell said he was not overly concerned about a flattening yield curve, saying that development was expected as the Fed began hiking rates in December 2015. An inverted yield curve has typically signaled an upcoming recession in the past, but Powell said while there is always a risk of a recession, he does not see that risk "at all high at the moment."
The Fed's quantitative easing efforts were effective in bringing down long-term rates, Powell said, responding to a question about an academic paper last week that questioned its effectiveness. Powell said he has not fully reviewed the paper but noted it took a different approach than other studies in the past, adding those studies found the purchases "did their job."
Powell says Fed 'eager' for vacancies to be filled
Powell also said it is critical for the Fed's Board of Governors to gain new members, since Janet Yellen's exit left it with three out of seven members. The Fed has not dropped down to those levels since its current structure started in 1936.
Powell, who joined the board in 2012, said vacancies have persisted in recent years and noted he "wore an awful lot of hats" before he became chair to deal with all of the work.
"We're all three quite eager to have more people on board," he said.
Rep. Roger Williams, R-Texas, has sponsored a bill to ensure all of the Fed's regional bank presidents get a vote each year on the FOMC. Right now, the New York Fed president gets a permanent vote and four other regional Fed presidents rotate their voting spots every year, which Williams said "under-represents certain economies." Powell said he does not think the current system is broken and that all Fed officials participate in the FOMC meetings.