Fed: U.S. Economy Needs to Tighten Up Before Rates Can Rise

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Fed: U.S. Economy Needs to Tighten Up Before Rates Can Rise
Andrew Harrer/Bloomberg via Getty ImagesFederal Reserve Governor Jerome Powell
By Marc Jones and Francesco Canepa

LONDON -- Federal Reserve Governor Jerome Powell said Friday that he wanted to see signs that the U.S. economy was tightening up before interest rates could be raised.

While acknowledging that employment in the United States had rebounded, Powell highlighted "significant" slack, referring to unemployed or underutilized workers.

The Fed hopes to end its stimulus program for the U.S. economy by the end of the year, clearing the way for it to eventually raise interest rates.

"I'm looking for some sign the economy is getting tight before we can start thinking about raising rates," Powell said at an event in London.

Powell added there was a "significant amount of slack in the labor market" in the United States at present.

%VIRTUAL-article-sponsoredlinks%In brief prepared remarks, Powell said the Fed's evolving statements about the future path for rates have played an important role in shaping market expectations about U.S. monetary policy.

With the overnight federal funds rate stuck near zero for years, he said the management of expectations has been important in allowing investors to buy and sell bonds with confidence that rates wouldn't unexpectedly increase.

That, for example, has lowered the premium charged for longer-term loans, and helped tamp down volatility as well, Powell said.

"Forward guidance has generally been effective in providing support for the economy at a time when the federal funds rate has been pinned at its effective lower bound," said Powell, who is awaiting Senate confirmation to a new 14-year term on the Fed board.

Powell added that markets were "well aligned" with the guidance the central bank has offered about the likelihood that its asset-buying program will be stopped by the end of the year.

-Additional reporting by Howard Schneider in Washington.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Fed: U.S. Economy Needs to Tighten Up Before Rates Can Rise
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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