Fed officials express caution about pace of future hikes

Fed officials express caution about pace of future hikes

Fed officials express caution about pace of future hikes

Wall Street last month gave the Federal Reserve its worst grade since Jerome Powell took the helm of the USA central bank earlier this year, docking points for a communications misstep early in October that sent US stocks tumbling.

Jerome Powell, chairman of the Fed said on Wednesday that the interest rates "are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy".

US Federal Reserve chairman Jerome Powell.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients.

The words prompted traders and analysts to revise their latest economic forecasts that predicted the Fed might raise rates in December for the fourth time this year before approving a further three rate hikes next year. "We will be paying very close attention to what incoming economic and financial data are telling us".

Market reaction reflected investors' fears the Fed might end up making the kind of mistake Powell talked about - tightening policy too much because of a false read on where neutral is, at a time when clouds had begun to form on the economic horizon.

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.

"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce".

The minutes flagged the possibility that the Fed will make another adjustment to maintain control of the policy rate, by adjusting the separate interest rate on excess reserves, or IOER, which is now set at 5 basis points below the upper bound of the federal funds target range. Investors interpreted his remarks as evidence that the Fed might consider pulling back from quarterly rate hikes.

But Fed officials also raised the prospect they could slow plans to raise rates next year, and discussed how to signal to investors that they would stay flexible "in responding to changing economic circumstances".

Speaking at the Economic Club of NY on November 28, Jerome Powell outlined the Fed's decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation's financial stability.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected past year to oversee the world's most powerful central bank a "threat". Three of those increases have been under Powell.

The Fed has been trying to strike a balance between not moving too fast and risking shortening the economy's longest running expansion versus not moving too slowly and risking the economy overheating.

Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year. Last month, Mr Powell said the Fed still had a "long way" to go before it reached that equilibrium.

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