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

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

Federal Reserve Chairman Jerome Powell struck a generally optimistic note on Wednesday about the state of the USA financial system and indicated that interest rates, while still low by historical standards, are near neutral, sending stocks higher.

Stocks had also rallied Wednesday after Fed Chairman Jerome Powell said interest rates were already close to estimates of "neutral" - the rate which neither accelerates not restrains economic activity - meaning they might not have to rise much higher.

A few participants also expressed reservations about the timing of the next rate hike, suggesting that the benchmark rate - which determines the cost of borrowing on credit cards, mortgages and other loans - may now "be near its neutral level" and "further increases" could slow down the economy's expansion.

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

Fed officials appeared less concerned about a market selloff that led to a rotten October for stocks.

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.

Powell also revealed the economic growth coincides with inflation, and the Fed's annual goal of 2 percent interest rate increases.




Earlier in November, Powell was optimistic about the state of the economy, citing strong annual economic growth exceeding 3 percent and unemployment at a near five-decade low of 3.7 percent. After mid-year, Ashworth said he expects that "a slowdown in economic growth to below potential forces (the Fed) to the side lines".

Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates. And the headline unemployment rate drops further. His emphasis on Wednesday suggested greater flexibility to stop sooner or move more slowly.

While numerous Fed watchers saw the remarks as nothing new, many investors heard it as a signal that the central bank was far from finished raising interest rates. "Certainly, all meetings are live now". "Not even a little bit".

"What do you do?" said Powell in NY. "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".

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.

The dollar, which has outperformed bonds and the S&P 500 this year, benefiting from rising interest rates and safe-haven flows triggered by global trade tensions, fell back after Powell spoke.

Joblessness stood at 3.7% in October, well below the rate the Fed sees as sustainable in the longer run. Three of those increases have been under Powell. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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