Fed likely to raise rates in December but concerns mounting: minutes

Fed Chairman Powell “Rate Hikes Are Not Automatic in Healthy Economy”

Fed Chairman Powell “Rate Hikes Are Not Automatic in Healthy Economy”

Federal Reserve Chairman Jerome Powell cast a bright picture of the USA economy Wednesday and appeared to suggest that the Fed might consider a pause in its interest rate hikes next year to assess the impact of its credit tightening.

The Dow Jones Industrial Average rose 618 points to 25,366, a 2.5 per cent rise, in a surge that erased its November losses and put it back in positive territory for the year. But signs of a slowdown overseas and almost two months of market volatility - including a sharp selloff last week - have clouded an otherwise mostly rosy USA picture in which the economy is growing well above potential and unemployment is the lowest since the 1960s.

The reason for this was a formulation that the current key interest rate was just below the broad range of estimates for the neutral interest rate.

This week, a speech by Jerome Powell, the chairman of the US Federal Reserve, triggered strong price swings in financial markets. "We now run a larger risk" that communications at the Fed's December meeting will be more hawkish than markets expect, he said.

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.

Policymakers had provisionally pencilled in three quarter-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

The central bank's rate increases have gradually raised borrowing costs for consumers and businesses.

The minutes said that such a change would help to convey "the Committee's flexible approach in responding to changing economic circumstances", while market supposed that this could indicate possible changes for the Fed's rate hike decisions in 2019. 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. Critics have expressed worry that the president's attacks threaten the Fed's ability to operate free of political pressure.

But keeping rates "too low for too long" could create other risks, including accelerating inflation, he said.

Markets also focused on the G20 summit in Buenos Aires this weekend, where US President Donald Trump and his Chinese counterpart, Xi Jinping, are scheduled to discuss trade matters. But most analysts see that as farfetched. "If you follow the dot plots as consensus, there should be two more hikes next year, though that is not guaranteed and will be data dependent", said Michael DePalma, chief executive, PhaseCapital LP.

Asked about GM's layoffs and recent declines on Wall Street, Trump laid the blame on Powell.

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", he said. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

In his speech Wednesday, Powell spoke directly to the stock market volatility and somewhat downplayed the recent action.

The dollar index, which measures the greenback against a basket of currencies, was down 0.6 percent after Powell said that while there was "a great deal to like" about United States prospects, the Fed's gradual interest-rate hikes are meant to balance economic risks.

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