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DALLAS—Federal Reserve Chairman Jerome Powell said the central bank was closely monitoring a modest deceleration in global growth, whose strength last year had provided an important tailwind for the U.S. economy.
“This year has seen a gradual chipping away at that picture. You’ve seen a bit of a slowdown—not a terrible slowdown,” Mr. Powell said Wednesday evening. “You still see solid growth, but you see growing signs of a bit of a slowdown. And it is concerning.”
Because the U.S. economy is woven tightly into global supply chains, growth abroad is increasingly important for businesses, Mr. Powell said during a moderated discussion at the Dallas Fed with the reserve bank’s president, Robert Kaplan.
Mr. Powell acknowledged the recent stock-market selloff could also have an effect on financial conditions that slows growth, but he played down the idea that the Fed would change its policy plans based on recent volatility. Market conditions are “one of many factors” the Fed considers when deciding where to set interest rates, he said.
Officials voted unanimously in September to raise their benchmark rate to a range between 2% and 2.25%, and they held rates steady at their meeting last week. After the meeting, officials offered a mostly upbeat assessment of the U.S. economy, suggesting another rate increase is likely at their meeting next month.
In September, Fed officials penciled in plans to raise their benchmark short-term rate once more this year. Officials were split over whether to raise rates two, three or four times next year. That would push the rate closer to 3%, which is where most officials expect it to settle over the long term—a so-called neutral rate that neither spurs nor slows growth.
Mr. Powell said Wednesday the main challenge facing the Fed now is to consider how much further to raise rates and the pace at which the central bank raises rates. He said the Fed would evaluate “really carefully…how the markets and the economy and business contacts are reacting to our policy.”
Investors were watching Mr. Powell’s remarks carefully Wednesday after comments he made at his last public appearance, on Oct. 3, led some investors to believe the Fed might raise rates for longer than they had expected. This fueled worries, in turn, that the Fed might commit a policy error that results in a recession by raising rates too much.
Last month, Mr. Powell played down the debate over whether the Fed would raise rates above neutral, saying the concern was premature. Rates are “a long way from neutral at this point, probably,” he said during a moderated discussion in Washington. “We need interest rates to be gradually, very gradually, moving back toward normal.”
Those comments came amid a raft of strong U.S. economic data. Together, they raised investors’ expectations that the Fed favored more rate increases next year. Yields on the benchmark 10-year Treasury note briefly touched a seven-year high in early October. Bond yields rise when prices fall.
Even though the substance of Mr. Powell’s October comment largely reflected many Fed officials’ public projections, some commentators said his tone reflected greater conviction to raise rates, contributing to the bond-market selloff. Since taking his post in February, Mr. Powell had largely shied away from inferences that the Fed’s rate rises are on autopilot.
Rising bond yields, in turn, sent the stock market on a wild ride last month.
The potential of escalating tariffs, resulting from the Trump administration’s trade disputes with China, have also weighed on the outlook for corporate earnings, hurting stocks.
Mr. Powell reiterated his view on Wednesday that trade disagreements could help the economy if they result in lower overall tariffs. “If instead, it perhaps inadvertently winds up where we have more protectionism around the world…that would be unfortunate,” he said.
Fed officials have been gradually raising their short-term benchmark rate to keep the economy on an even keel. The economy in the second and third quarters expanded at roughly double the growth rate Fed officials believe can be sustained over the long run unless the supply of workers, or their productivity, increases more rapidly.
Meanwhile, the unemployment rate held at 3.7% in October, a nearly half-century low, and average hourly wages rose 3.1% from a year earlier, the biggest year-to-year increase since 2009.
Most Fed officials subscribe to some version of a framework that posits wages and prices should rise as the unemployment rate falls below a so-called natural level consistent with stable inflation. Officials, including Mr. Powell, have been careful to note this relationship is weaker than it used to be and that their estimates of the natural rate of unemployment could be wrong.
Inflation will be central to determining how the Fed’s policy path evolves. Inflation has been holding near the Fed’s 2% target for most of this year after undershooting it for many years. The Fed views inflation around 2% as a sign of balanced supply and demand.
One example of how the Fed’s short-term rate increases, after years of extremely easy monetary policy, have been rippling through the economy can be found in the housing sector. Interest-rate increases have pushed mortgage rates to a seven-year high, and sales and construction activity have slowed. Higher mortgage rates have exacerbated affordability challenges stemming initially from low supplies of homes for sale that have rapidly pushed up prices in recent years.
“There are a lot of factors weighing on home-building,” said Mr. Powell, including interest rates. “It’s an interest-sensitive sector and as our policy path has been moving along we try to keep an eye out for sectors like that.”
Mr. Powell, when asked about President Trump’s recent criticism of Fed rate increases, played down any tensions. In an interview with The Wall Street Journal last month, Mr. Trump cited the Fed as the top risk facing the economy. He earlier described the Fed as crazy and out of control due to its plans to gradually lift rates despite few obvious signs of inflation.
“We have protections from political involvement,” said Mr. Powell, citing legal safeguards that prevent the Fed’s decisions from being reversed by the executive branch. Mr. Powell didn’t mention Mr. Trump by name.
Mr. Powell also defended the principle of monetary-policy independence for central banks, citing the importance of credibly guarding against inflation by remaining free of politics.
“It enables us to serve the public better,” he said. “Central banks, when they get too close to the government, incentives change.”
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