Fed minutes: Further hike "warranted soon", debate opened on pause

Anna Jefferson
December 3, 2018

Federal Reserve chairman Jerome Powell has opened the door for a potential pullback in projected United States interest rate hikes for 2019 following a widely expected increase in December.

The chairman also suggested that interest rates appear to be just below the level the Fed calls "neutral", where they are thought to neither stimulate growth nor impede it.

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.

Nor did the Fed and other major economic bodies see the "excesses" that led to the financial meltdown of 2008, instead claiming that the USA and world economy had entered a period of "great moderation". Stocks swooned on those remarks as investors bet the US central bank would need more rate hikes to prevent the economy from overheating.

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In his speech to the New York Economic Club, Powell again stressed that there was "no preset policy path" for interest rates and said the central bank had moved gradually, since "moving too fast would risk shortening the expansion".

"Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook", the minutes said.

For his part, Trump has sought repeatedly to shift blame for any economic troubles to the Fed and its rate increases.

Many economists also worry about potential economic damage caused by Trump's trade conflicts with China and other nations. "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".

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"Powell is not suggesting that since they are just below the range they may stop soon". That remark had unsettled investors who feared it signaled that the Fed would continue raising rates well into the coming months. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said. "I think that was what really sparked the market to go higher". "There's no question about that".

"It removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", said Roberto Perli, an analyst at Cornerstone Macro, in a report Wednesday.

Powell noted the word "bubble" wasn't mentioned in the report, though he said some asset prices, such as corporate debt, were high relative to the past. Under uncertainty of this kind, you be careful.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate. Responding to the interviewer's comment that he had considered Powell would be a "low-rate person", Trump said: "Well, let's see what happens with Jay Powell".

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On the economic front, US real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the third quarter, down from a 4.2 percent increase in the second quarter, according to a report released by the Commerce Department on Wednesday. The US federal funds rate range is now 2.0-2.5 per cent.

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