US Fed says another rate hike "likely to be warranted fairly soon"

Ivan Schwartz
November 30, 2018

The months following Powell's original comments were hard for the stock market as the interest rate, concerns over the ongoing trade war with China and turbulence in the tech sector left all three major indexes in correction territory before bouncing back this week. After mid-year, Ashworth said he expects that "a slowdown in economic growth to below potential forces (the Fed) to the side lines".

The Fed's current pattern of raising rates gradually - roughly once a quarter over the past two years - is an effort to balance two risks. But the likely pace of rate increases next year remains a subject of speculation.

Compared with his recent predecessors, Mr. Powell, who became Fed chairman in February, has more regularly noted that the past few expansions ended with bursting financial bubbles rather than surging inflation.

Trump has repeatedly blasted Powell's decision to hike the rate so drastically at once, appearing to pin October's volatile stock market performance on that development.

He said that while there was "a great deal to like" about U.S. prospects, the Fed's gradual interest-rate hikes are meant to balance risks as it tries to keep the economy on track. But signs of a slowdown overseas and almost two months of market volatility - including a sharp sell-off in equities last week - have clouded an otherwise rosy picture of the US economy.

Powell repeated his view that the Fed will have to be especially responsive to incoming economic data.

Powell said that "there is no preset policy path" for future rate hikes and the current level for the Fed's benchmark rate was very close to "neutral", the point where the Fed is neither stimulating economic growth or slowing growth.

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"They're making a mistake because I have a gut and my gut tells me more sometimes than anybody else's brain can ever tell me", the president added.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes.

"As always, our decisions on monetary policy will be created to keep the economy on track", he said. Of course, to us, the Fed's change in tone comes as no surprise.

The Dow was up by more than 500 points. If the Fed is deterred from keeping rates too low for too long, the likely upshot will be a burst of inflation and interest rates that have to be raised aggressively later on to combat it, jeopardising growth and risking higher unemployment.

He also explained the Fed's inaugural report on the stability of the USA financial system, released earlier Wednesday, noting that the central bank did not see "dangerous excesses" in stock markets.

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", he said.

"Powell said nothing to suggest that he or the majority of the FOMC think they'll be able to stop at the bottom of the range, after just one more hike", said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

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