Fed officials express caution about pace of future hikes

Was Post Fed Chair Speech Rally a Market Overreaction

Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez

Thursday's minutes reinforce a message sent by Federal Reserve Chairman Jerome Powell as yet another signal the Fed may pause rate hikes next year.

"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 U.S. equities, while the 10 year yield briefly dipped below 3% for the first time since mid-September". On October 3, he said rates were "a long way" from neutral levels.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 per cent - in early October, just after Mr Powell had sounded a quite confident tone on the economy.

U.S. central bankers believe another interest rate hike is due "fairly soon", boosting widespread expectations the Federal Reserve will raise lending costs next month, according to meeting minutes released Thursday. Fed officials agreed that it would be "appropriate" to take action before the December meeting if necessary to keep the federal funds rate "well within" the Fed's target range, according to the minutes.

If the Fed, as expected, raises the fed-funds rate next month to a band between 2.25% and 2.5%, that would leave it touching the bottom of the range of neutral estimates but four more quarter-percentage-point increases from the top.

The central bank chief said his colleagues and many other economists "are forecasting continued solid growth, low unemployment and inflation near 2 per cent". "This sounds like a more flexible approach to policy for 2019 than the impression created by the notion that the Fed has chose to lift the federal funds rate to neutral and that neutral was 3% or higher".

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY. 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.

"By clearly and transparently explaining our policies, we aim to strengthen the foundation of democratic legitimacy that enables the Fed to serve the needs of the American public", he said.

"Neutral" means the rate neither stimulates nor drags on economic growth. Jerome Powell has said the Fed's key rate is "just below" neutral. "As you get closer you tack a little bit more". At the same time, Fed officials are emphasizing they are becoming increasingly reliant on indicators and data to tell them that they are getting close to neutral. Bloomberg Economics anticipates three increases. This gap, which measures expectations on rate increases in the next year, has narrowed to 23 basis points, indicating that traders are not penciling in more than one increase in 2019, although the Fed's median projections still point to three increases next year.

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

"There is a great deal to like about this outlook", he added.

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