(Reuters) - The Federal Reserve’s steady interest rate hikes are the best way to protect the U.S. economic recovery and keep job growth as strong as possible and inflation under control, Fed Chair Jerome Powell said on Friday in a high-profile endorsement of the central bank’s current approach to policy.

Federal Reserve Board Chairman Jerome Powell speaks at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., June 13, 2018. REUTERS/Yuri Gripas

Story:

KEY POINTS:

* FED CHAIR POWELL SAYS FURTHER INTEREST RATE HIKES LIKELY APPROPRIATE IF STRONG INCOME AND JOB GROWTH CONTINUE

* FED’S POWELL SAYS GRADUAL RATE HIKES NAVIGATE RISKS OF GOING TOO SLOWLY VS TOO FAST

* POWELL SAYS FED SEES NO CLEAR SIGN OF INFLATION ACCELERATING ABOVE 2 PCT

* POWELL SAYS THERE DOES NOT SEEM TO BE ELEVATED RISK OF OVERHEATING

* POWELL SAYS ECONOMY IS STRONG, INFLATION NEAR 2-PCT GOAL, MOST WHO WANT A JOB CAN FIND ONE

* POWELL SAYS HE’S CONFIDENT FED WOULD DO WHATEVER IT TAKES SHOULD INFLATION EXPECTATIONS SHIFT OR CRISIS THREATEN

* POWELL SAYS FED CAN BEST SUPPORT PROGRESS ON LONG-RUN STRUCTURAL ISSUES FOR ECONOMY BY FOLLOWING ITS MANDATE

COMMENTS:

MAZEN ISSA, SENIOR FX STRATEGIST, TD SECURITIES, NEW YORK

“The dollar’s reaction is a part of a narrative that was established earlier this week, one that we saw in the minutes, with respect to the Fed making progress towards neutral. Specifically, the reference there was that some members had become more uncomfortable with the narrative in the Fed policy statements that policy is still accommodative...That narrative found its way into Powell’s speech, who specifically noted that policy has become closer to neutral.

“What this suggests is that the diversion narrative we have seen become so entrenched in Q2 and Q3 of this year may start to show some cracks. The Fed’s runway has become much shorter over the last couple of years in comparison to other G10 central banks which have a much longer runway simply because they are so far behind in normalization…The dollar may have seen its top for the year… Any signal that there may be less tightening in the pipeline may work against the dollar.

“We are basically in the dog days of summer. Some of the dollar’s reaction may be exaggerated. Liquidity is not at its finest.”

ALFONSO ESPARZA, SENIOR CURRENCY ANALYST, OANDA, TORONTO

“It was nothing new and shocking. He is sticking to the previous Fed comments, what we saw in the minutes.

“I think the key word right now is inflation. How inflation has not gone above target and is still under control. I think the Fed was very neutral on the statement that it will continue to hike but nothing beyond what is already expected by the market.

“All the Fed members this week, especially in the past two days, have been very clear to say that the Fed is an independent body. They are trying to minimize the effect of (Donald Trump’s ) words. It is obvious that the Trump Administration would rather not have rates go any higher but the Fed is sticking to the plan. In terms of dollar strength, it’s not adding much because it’s already priced in.

“The September rate hike is very firmly on the table. Only something very shocking would take it off.

“December is a bit more of a question mark, but as the Fed said, it’s very data dependent. So it depends on how inflation behaves between now and the end of the year.

KIM FORREST, SENIOR PORTFOLIO MANAGER, FORT PITT CAPITAL GROUP, PITTSBURGH

“It looks like that there’s no real news other than that he is trying to assure markets that inflation is the bigger issue here.

“Powell is not an economist, there’s some question out there whether he understands his job and I would say that this speech says that yes, he does understand his job because it has switched from trying to get to full employment because that is half of the job, to inflation and I think inflation is the markets worry so this is putting that to rest.

“He’s looking at strong income and job growth and I think increasing interest rates are a way to control the economy not to overheat and thus cause inflation and so I think he’s laying that out.

“Bank stocks are inflation rate sensitive and a little bit higher interest rate is good for them ,a lot higher is not, as that would slow down the economy.

“Moving the interest rates too high, too fast is a danger and it doesn’t sound like that’s what he’s going to do.

“Market’s don’t need a whole lot of incentive to go higher and I think this gives it a reason to go higher.

MARK GRANT, MANAGING DIRECTOR AND CHIEF GLOBAL STRATEGIST AT B. RILEY FBR, INC, FT LAUDERDALE, FLORIDA

“Chairman Powell is taking the stance that I expected. He is in the middle ground of the Fed’s policy makers and is undeterred by President Trump’s comments, as I thought.

“President Trump, or any Congressman or Senator, in my opinion, has the right to comment but the Fed is an independent body in the American government and the members have the right to make their own decisions.

“The Chairman assessed the economy as good but not overheating which is a positive sign. He made his viewpoint quite clear that gradual interest rate hikes would likely be forthcoming if the economy remained strong. His comments about inflation were especially significant as he downplayed going over 2 percent and indicated a steady course.

“All in all, it was a generally positive speech for both the economy and for the markets, in my estimation.”

MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT

“I think the markets are misinterpreting (Powell’s) comments on inflation. His comments suggest he’s looking beyond inflation for signs of excess. Saying he’s looking to the financial markets too makes a lot of sense to me … The markets are somewhat overheated, so that’s something investors should be concerned about if he’s concerned about it.”

PHIL ORLANDO, CHIEF EQUITY MARKET STRATEGIST, FEDERATED INVESTORS, NEW YORK

“It sounds like a goldilocks-type assessment, that the economy is doing fine, the labor market is doing fine and inflation isn’t accelerating or getting away from us. So we are just going to continue to gradually normalize policy over time. The reality is we have an FOMC meeting coming up in a month, that will be a new dot plot meeting and it will also be a presser. So it was probably appropriate for him to leave the detail, not for today, but for next month when the full committee gets together and they vote again with a new set of dot plots.

“He probably did the right thing, his first Jackson Hole, he just sort of reiterated the key themes. He walked the fine line, sort of reiterated confidence that things are going well. There are no real problems and the expectation is monetary policy is not going to deviate materially from what we thought was sort of the Fed strategy going into the speech. But he didn’t provide us with any details on a change in policy. He is going to leave that for the FOMC meeting coming up in a month when he has the full committee and the benefit of a new set of dot plots.”

BRAD BECHTEL, MANAGING DIRECTOR, JEFFERIES, NEW YORK

“The inflation commentary may be slightly on the dovish side, but there doesn’t seem to be any change in view on the current pace of gradual hikes. We are still looking for September and we are still confident December will be done as well.

“Obviously, the market is less certain on December, but we are confident they will go in September and in December as well.

“September seems a done deal, nothing has changed on that.

BRIAN BATTLE, DIRECTOR OF TRADING, PERFORMANCE TRUST CAPITAL PARTNERS, CHICAGO

“His text comments are as expected. Is he going to say anything off the cuff? ... The market’s saying we got exactly what we expected.”

“There’s going to be gradual rate increases as long as we have a strong economy. The only caveat to that is the Fed has in the past reacted to global macro events.”

MARKET REACTION:

STOCKS: S&P 500 .SPX adds to slight gains and was last up 0.34 percent

BONDS: U.S. Treasury yields slipped; 2s US2YT=RR at 2.6286 pct; 10s US10YT=RR at 2.8333 pct

FOREX: The U.S. dollar index .DXY weakened further, last off 0.58 percent