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Powell on the economy: 'We don't see any evidence at all of overheating'

Brian Cheung

Federal Reserve Chair Jerome Powell said Wednesday that the economy is not showing any signs of overheating despite surprising GDP numbers for the first quarter of 2019, suggesting that the Fed may not face much pressure for a rate hike at the moment.

“We don’t see any evidence at all of overheating,” Powell said in response to a Yahoo Finance question about whether or not stronger GDP readings in 2019 would point to a hot U.S. economy.

In Wednesday’s meeting the Fed opted to hold rates steady at its target range of 2.25% to 2.5%, highlighting inflation that is “running below” its target. The Fed, however, noted that economic activity “rose at a solid rate” during the first quarter.

On Friday, the Bureau of Economic Analysis announced that the economy had grown at a 3.2% annualized rate in the first three months of the year, which surged well-past expectations for 2.3% growth for the first quarter.

Powell said in Wednesday’s press conference that the 3.2% print showed slower growth in private consumption and business fixed investment, but expects both components to “bounce back” and contribute to “healthy GDP growth” over the rest of the year.

Yet the Fed’s projections for GDP growth for 2019, released in its March meeting, suggested that GDP growth would come in at 2.1% for the year.

In saying that there are no signs of overheating, Powell pointed to low inflation. Readings of core personal consumption expenditures - the Fed’s most preferred measure of inflation - prices rose by only 1.6% in March. That figure is well short of the Fed’s stated inflation target of 2%.

Federal Reserve Board Chair Jerome Powell speaks at a news conference following a two-day meeting of the Federal Open Market Committee, Wednesday, May 1, 2019, in Washington. (AP Photo/Patrick Semansky)

Powell also referenced the labor market and said the economy is not suffering from too much tightness.

“There, for a long time now, were anecdotal reports of labor shortages and difficulty in finding skilled labor and that kind of thing,” Powell said. “Nonetheless you have very strong job creation and you have wages moving up at a rate that is appropriate given inflation and given productivity but not at all signaling any overheating at all.”

Powell’s commentary suggests that the Fed is not anywhere close to where policymakers saw the central bank in the middle of 2018, when the Fed raised rates four times to temper an economy that was also seeing a tighter labor market and an increase in wage growth.

Still, Powell did not fuel speculation about a rate cut, saying there is “no strong case” in moving in either direction at the moment, insisting that the Fed will continue to remain “patient.”

“We think our monetary policy stance is in a good place,” Powell said.

The next FOMC announcement will be June 19.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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