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Powell Opens Door to Possible Pullback in Fed Rate-Hike Outlook

01 December, 2018, 08:11 | Author: Melinda Barton
  • Was Post Fed Chair Speech Rally a Market Overreaction

Federal Reserve Chairman Jerome Powell, faced with escalating attacks by President Donald Trump, defended the central bank's move to gradually raise interest rates, saying the policy is necessary after almost a decade of historically low rates.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth", Powell said while speaking at the Economic Club of NY.

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 per cent - in early October, just after Mr Powell had sounded a quite confident tone on the economy.

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

It isn't clear that these conditions could trigger a recession on their own, he said, noting that the ratio of corporate debt to economic output didn't seem unusual.

Paul Ashworth, chief USA economist at Capital Economics, said he expects two rate hikes in 2019, not the three the Fed has been projecting for next year.

Market reaction reflected investors' fears the Fed might end up making the kind of mistake Powell talked about - tightening policy too much because of a false read on where neutral is, at a time when clouds had begun to form on the economic horizon. "You slow down. You maybe go a little less quickly".


But, wait: Didn't the head of the Fed just give investors optimism that it was nearing its comfort zone for the cost of cash - its so-called neutral rate?

Kashkari said he was "more worried" about that the Fed raises rates "prematurely" when the job market "has slack" and the wage growth hasn't picked up yet.

The benchmark rate, now at 2 to 2.25 per cent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 per cent.

He did not specifically cite the criticism he has faced from the White House, but he defended the Fed's recent moves and said "there is no preset policy path". Three of those increases have been under Powell. Powell, who took over as Fed chairman in February, has said he wants to provide the public with "plain English" descriptions of what the central bank is up to.

The minutes of the Fed's November 7-8 meeting showed that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.

Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish".

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