Fed Chairman Powell Unravels Inflation Riddle

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The Federal Reserve will likely need to keep raising USA interest rates to keep inflation under control, Fed Chairman Jerome Powell said, adding that it was too soon to know if rising trade tensions would hit the US economy. But he said other indicators, such as labor-force participation that remains depressed by historical standards, suggest that the economy has not yet reached that point.

But as global stocks fell on jitters over escalating US-China trade tensions, Powell merely said it was too soon to know if the trade issue would take a toll on the US economy, which has been steadily strengthening.

Williams said that although the rhetoric on tariffs so far has been more extreme than the actions taken, he loses sleep over the prospect of an actual trade war, which he warned could result in slower growth, an inflationary spike and lower productivity. "It's very hard to prove it to the economists - you have to be able to conduct some kind of natural experiment, or to look at a place which didn't have the web and then did, and you can see how that is".

China as of the end of January held around US$1.7 trillion of Treasuries, making it the No. 2 overall owner of United States government bonds after the Federal Reserve. Soybeans are the top U.S. agricultural export to China.

Tariffs could increase inflation on goods shortages, making it more likely the Federal Reserve will continue raising interest rates, though they also risk hurting economic growth.

He pointed to a positive outlook for the economy, saying that the labor market is "in the neighborhood of maximum employment" and Fed officials have increased confidence that inflation would move up toward the 2 percent target.

"Our path of gradual rate increases is meant to balance these two risks", Mr. Powell said.

Powell's comments hewed closely to remarks he made to reporters last month that emphasized the stronger USA economic outlook after the Fed raised interest rates and signaled at least two more moves in 2018.

A report released by the Labor Department on Friday showed that the unemployment in the United States has kept at 4.1 percent in March, lower than the Fed officials' estimate of longer-run normal rate of unemployment. In order to keep the economy on the right track, he suggested it would be necessary to continue gradually raising interest rates.

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