Federal Reserve appears more cautious on interest rate hikes next year

01 December, 2018, 12:58 | Author: Kevin Carter
  • Was Post Fed Chair Speech Rally a Market Overreaction

But officials discussed changing their postmeeting policy statement to emphasize their flexibility to respond to fresh economic developments as they weigh their rate moves next year.

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. His speech to the Economic Club of NY sent markets soaring more than 600 points on Wednesday.

"Powell's comment that the benchmark funds rate is "just below the broad range of estimates of the level that would be neutral for the economy" was enough to spark a strong bounce in USA equities, while the 10 year yield briefly dipped below 3% for the first time since mid-September".

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected previous year to oversee the world's most powerful central bank a "threat".

The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, Powell said.

European shares inched up on Thursday as dovish comments from Federal Reserve Chairman Jerome Powell helped offset uncertainty over a possible escalation in the US/China trade dispute. That comment had unsettled investors who feared that it meant the Fed would need a number of further hikes to get to neutral.

On Wednesday Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment and inflation near its 2 percent target. And then wage growth is tepid.

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In an interview with the Washington Post earlier this week, Trump blamed the Fed for recent stock market declines and General Motors's announcement of plant closures and layoffs. Yet in the two most recent USA hiking cycles, gold has risen even as equities climbed because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value, said Adrian Ash, research director at London-based BullionVault Ltd. That suggested to many investors that fewer rate increases might be on the way. The president has blamed the Fed for the steep two-month fall in the stock market and the possibility that his efforts to boost growth with a major tax cut will be thwarted by rising interest rates. "This sounds like a more flexible approach to policy for 2019 than the impression created by the notion that the Fed has made a decision to lift the federal funds rate to neutral and that neutral was 3% or higher".

An expected December rate increase was further cemented into place.

Fed officials appeared less concerned about a market selloff that led to a rotten October for stocks. "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing", he was quoted as saying in the report.

Higher interest rates tend to slow economic growth over time as well as pressure stock prices according to Powell. Home sales, vehicle sales, business investment and other parts of the economy that are sensitive to interest rates have begun to soften, evidence that the Fed's eight rate increases since 2015 are changing household and business behaviour. Bloomberg Economics anticipates three increases.

Joblessness stood at 3.7% in October, well below the rate the Fed sees as sustainable in the longer run.

The Fed is expected to increase rates again in December and has estimated three more increases might be necessary next year.

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