Fed's Bullard warns of recession risk in raising rates

Traders work on the floor of the NYSE in New York

Traders work on the floor of the NYSE in New York

Delivering an address at the Fed's yearly confab in Jackson Hole, Wyoming, Fed chairman Jerome Powell said he anticipates that the current path of gradually rising interest rates will continue.

"The economy is strong", he said.

The Fed in June increased interest rates for the second time this year, and pencilled in two more rate hikes for the year.

Powell's speech discussed at length the challenges of monetary policy at a time when economic benchmarks - such as estimates of full employment or the neutral policy rate - are uncertain.

Mazen Issa, senior FX strategist at TD Securities in NY, said Powell's remarks built on a stance seen in the minutes of the Fed's latest policy meeting released on Wednesday.

While US inflation has recently moved up near 2 per cent, Powell said he sees "no clear sign of an acceleration above 2 per cent" and there does not seem to be "an elevated risk of overheating".

Powell sketched a positive picture of the USA economy and said the Fed's incremental approach to raising rates has so far succeeded. The bank made a total of seven rate hikes since December 2015, three coming past year.

Asked if a rate hike at the Fed's next policy meeting in September could invert the yield curve, Bullard said, "That's a possibility, maybe, depending on how hawkish it was read by the market".

Powell's statement that rate hikes are keeping job growth strong and inflation under control was a high-profile endorsement of the central bank's current policy approach after U.S. President Donald Trump criticized the pace of rate hikes this week.

But Trump has said rising interest rates - which tends to strengthen the dollar, making United States exports more expensive - will slow the economy and offset the impact of the tax cuts he championed.

That could lead the Fed to change course from its gradual interest rate hike plan if Powell seems concerned that it could rattle the economy.

Unemployment rate fell to 3.8 percent - a level that was last seen in April 2000 and in the year of 1969.

"The dollar's reaction is a part of a narrative that was established earlier this week, one that we saw in the minutes, with respect to the Fed making progress toward neutral", Issa said.

The conference has taken on a mystique since past Fed chairmen and other central bankers have occasionally used the event to signal a change in policy. "My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 per cent". Next month, the Fed is widely expected to resume raising rates.

However, he noted the USA economy remained strong and anyone who wanted a job could find one, while prices were rising at about the Fed's target pace of 2%.

European stocks look set to open largely unchanged on Friday as trade talks between the USA and China ended without progress, raising concerns that a prolonged trade spat could hurt global growth.

"I'm not thrilled with [Powell's] raising of interest rates, no".

Powell's careful comments aren't likely to convince Trump, who insiders say is concerned that a rate-driven economic slowdown could hit right as he's gearing up for a 2020 re-election campaign.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Trump can decide what to comment on and is not anxious that the criticism will affect the central bank's monetary policy.

Recommended News

We are pleased to provide this opportunity to share information, experiences and observations about what's in the news.
Some of the comments may be reprinted elsewhere in the site or in the newspaper.
Thank you for taking the time to offer your thoughts.