Fed chairman: Gradual rate hikes best way for now

By Ovunc Kutlu

NEW YORK (AA) - The head of the Federal Reserve said Tuesday it is best for the central bank is to keep gradually rising interest rates for now, given a strong job market and inflation is near the Fed's target.

"We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses," Jerome Powell told the Senate Committee on Banking, Housing, and Urban Affairs at the beginning of his two-day semi-annual testimony to Congress.

"On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective," he said.

The unemployment rate was at 4 percent in June, after hitting 3.8 percent in May -- its lowest level in 18 years.

"The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago," Powell said.

The Fed Chair did not provide much comment on the current shift in trade policy in Washington in which the Donald Trump administration introduced tariffs against China and European countries which has raised concerns about a potential crippling effect on the global economy.

"It is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy," Powell said.

Andrew Hunter, a U.S. economist at London-based Capital Economics, said in a note that Powell "implied that any downside risks from trade policy could be outweighed by continued upside risks to activity from the recent fiscal stimulus."

Hunter said despite trade tensions posing a downside risk, he expects strong activity growth and rising inflation to prompt the Fed to raise interest rates in September and December, and twice more in early 2019.

The central bank has already raised interest rates twice this year in addition to three hikes last year.

The Fed’s next meeting will take place at the end of the month.