US Federal Reserve official optimistic on economic outlook

[WASHINGTON] The outlook for the US economy is upbeat as factors that have been holding down growth, including businesses' reluctance to invest, begin to fade, a US central banker said on Monday.

But Federal Reserve Vice-Chair Randal Quarles said it is too soon to say the economy is at a turning point, and even with the possibility growth could accelerate, he seemed less concerned about the threat of inflation.

"I am fairly optimistic about the current state of the economy," Mr Quarles said in a speech to business economists, adding that "it has been quite some time since the economic environment has looked as favorable as it does now." Whether the US economy can sustain the faster pace will depend on whether the "factors that have been holding back growth for the past decade diminish, including weak investment and productivity."

But there are encouraging signs that businesses are finally starting to boost investment, which could be helped by the recent corporate tax cuts, he said.

Even so, this shift to a higher growth rate remains "more as a clear possibility than an unarguable reality," Mr Quarles said.

The Fed was expected to raise the benchmark lending rate three times this year, but many economists now think four increases are more likely.

Mr Quarles simply said he expects "further gradual increases in the policy rate will be appropriate."

The central bank's vice chairman for supervision delivered his remarks the night before newly-installed Fed Chairman Jerome Powell is due to testify before Congress in his first public appearance since taking over from Janet Yellen.

His debut will be closely scrutinised for hints of whether the Fed is inclined to raise the benchmark interest rate at a faster pace.

INFLATION RISK?

In a nod to the concerns that have roiled global stock markets this month, amid fears rising wages will fuel price increases and prompt the Fed to be more aggressive, Mr Quarles said the inflation threat will depend on the driving factors.

"It might seem reasonable to assume that faster growth would lead to firmer inflation. However, I think a lot remains to be seen," he said, adding that "the degree to which growth spurs inflation is likely to be determined by the underlying factors that are prompting the increase in growth."

An expansion driven by rising demand is likely to have a greater effect on prices than increasing the growth potential through investments that improve productivity.

"Growth led by an increase in the economy's productive capacity, either through increased labor force participation or higher productivity growth, is likely to impart less upward pressure on prices," he said.

But he acknowledged that there now are "some upside risks" to the economic outlook, and cited higher global growth as a contributing factor.

As employment has increased steadily, creating difficulties for companies trying to fill open positions, "is likely that tightness in labour markets will eventually show up in wages and prices."

The absence of inflationary pressures over the past year has mystified Fed officials, but Mr Quarles said that "mostly reflects idiosyncratic and transitory factors," which he expects to fade, allowing inflation to move back to the central bank's two percent target "over the next year or so."

AFP