Powell, citing crisis damage, says rate hikes to proceed gradually after liftoff

WASHINGTON | By Howard Schneider

Federal Reserve Board of Governors member Jerome Powell listens during an open board meeting at the Federal Reserve in Washington December 14, 2012.

Reuters/Kevin Lamarque

(Reuters) - The effects of the financial crisis are making it hard for the Federal Reserve to measure the level of slack in the U.S. economy, so upcoming rate hikes should proceed at a slow pace as the central bank feels its way back to normal, Fed governor Jerome Powell said on Wednesday.
Powell said he expected a cycle of rate hikes, the Fed's first in more than eight years, to begin "later this year," as early as the Fed's June meeting.
But he joined what has become an apparent effort by top officials, including Chair Janet Yellen, to throw attention away from the date of the first hike, or "liftoff", and on to the likely gradual pace of tightening to follow.
While the first hike will breach a post-crisis psychological barrier, policymakers note
that rates will remain near historic lows, potentially for years to come.
"From a macroeconomic perspective, the precise timing of liftoff is less important than the path of subsequent additional rate increases," Powell said. "If the economy continues on its expected path, it will be appropriate for a time to increase rates fairly gradually."
Given the time it takes for monetary policy to affect economic conditions, he said rate hikes needed to begin "well before" the Fed reached its twin goals of full employment and stable, two percent inflation.
Inflation is lagging due to what Powell described as temporary factors like the drop in oil prices. But the economy may be nearing full employment, Powell said.
Many Fed officials, Powell included, agree there are pockets of slack - the number of part-time workers remains high, for example. However, Powell also noted that it is difficult in the wake of a crisis to determine how much of that to attribute to cyclical weakness that loose monetary policy might help fix, and how much is the result of permanent damage from the crisis.

If lost production, low investment and underused labor are permanent scars from the crisis, Powell said, then for the Fed's purposes the economy may be nearing a point where monetary policy cannot do much more to help.
Given the uncertainty, "we should look for a little more proof than usual that labor markets are tightening," before committing to a rate hike, Powell said. But "monetary policy cannot, by itself, avert all of the damage."