Powell Comments Suggest Fewer Rate Hikes Next Year

Ivan Schwartz
December 2, 2018

Federal Reserve Chair Jerome Powell appeared to signal a nearer end to the USA central bank's interest-rate hikes on Wednesday, saying interest rates are now "just below" estimates of neutral less than two months after saying rates were probably "a long way" from that point. He has more recently called the Fed "crazy" and "loco" over recent interest-rate increases.

"Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations", said the minutes.

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive", Oliver Pursche, chief market strategist at Bruderman Asset Management in NY, told Reuters.

The downgrade is at least partly attributable to Powell's remark on October 3 that interest rates were probably a "long way" from neutral, which seemed to contradict his comment a couple of months earlier rejecting a too-rigid reliance on the neutral rate to shape policy because it could lead to costly mistakes.

But Fed members agreed they would offer fewer signals about the future in their public statements, insisting, as Powell did this week, that they would instead monitor economic data and respond accordingly.

The impact of Powell's comments is visible in the spread of Euro-dollar interest rate futures between Dec 2018 and Dec 2019.

Mr. Powell didn't provide any more guidance on the likely path for rates, and he noted they remain low by historical standards.

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Stocks swooned as investors bet the United States central bank would need more rate hikes to prevent the economy from overheating. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.

The Fed has raised interest rates every quarter this year. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation. To date, markets have considered quarter-end meetings in March, June, September and December as "live" meetings that result in rate changes. "The market is putting too much weigh on the dovish arguments here; I don't think that is what he meant to signal".

His comments sparked a surge in a stock market that had struggled of late and came in the wake of criticism of the Fed's rate increases by President Donald Trump.

While Powell said Fed officials are monitoring these risks, they are not, on the whole, too anxious about them.

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy. Those increases have raised its benchmark rate to a still-historically-low range of 2 per cent to 2.25 per cent.

"There is a great deal to like about this outlook", Mr. Powell said.

The minutes of the November meeting showed Federal Open Market Committee policymakers had on their agenda a series of issues, ranging from a tightening of financial conditions, global economic risks, "and some signs of slowing in interest-sensitive sectors", that had begun to sway their assessment of the economy.

Other reports by GizPress

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