Federal Reserve Chairman Jerome Powell said March 1 the U.S. labor market has room to strengthen further without a spike in inflation and he does not see "strong evidence yet" that wages are picking up rapidly.
Nothing in recent inflation and employment data "suggests to me that wage inflation is at a point of acceleration, so I would expect that some continued strengthening in the labor market can take place without causing inflation," he told the Senate Committee on Banking, Housing, and Urban Affairs.
Powell's comments in the Senate hearing on the Fed's semiannual monetary policy report were more dovish than his Feb. 27 testimony in the House, where he seemed to open the door to further interest rate hikes and analysts heard a hawkish tone.
But Powell said during the hearing that he sees "no evidence that the economy is currently overheating."
A report last month showed wages grew at their fastest pace since 2009, leading to a sell-off in the stock markets as some feared the Fed may raise rates faster than planned. However, before Powell spoke Thursday, the U.S. Bureau of Economic Analysis reported core personal consumption expenditure, or PCE, inflation, stood at 1.5% in January. The Fed's preferred measure of inflation was unchanged from the previous two months and in line with expectations.
The Fed does not "see any strong evidence yet of a decisive move up in wages," Powell said, though he said the Fed expects that will soon begin to happen due to "strong momentum" in the economy. There also "may be additional slack in the labor force," he said, pointing out that the labor force participation rate for prime-age workers has room for improvement.
Still, Powell said, the risk of inflation shooting up and causing the Fed to raise rates quicker is more present today than two or three years ago. "The risks are more balanced than they used to be," he said.
Asked why inflation has stayed below the Fed's 2% target, Powell listed "the Amazon effect," in which competition from the online retailer has helped keep prices down, as one possible factor. But he maintained that recent inflation figures have been held down by temporary factors earlier in 2017 and pointed out other countries have also struggled with weak inflation.
"It's a global phenomenon," he said. "We don't perfectly understand it."
In December, Fed officials indicated they were eyeing three interest rate increases in 2018, though their projections came before Congress approved a tax overhaul and a budget deal to boost federal spending.
Powell declined to say whether the new tax law would lead to more rate hikes, saying fiscal policy is "one of the many, many factors" the Fed looks at when deciding on monetary policy. He said the law will "add meaningfully to demand" this year and help push up inflation, but added that the effects are hard to quantify.
U.S. economic growth, Powell added, will pick up over the next couple of years due to the tax law, but whether the law will boost longer-run growth prospects is an open question. "We hope the effects are meaningful there, as well," he said.
