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

Gladys Abbott
December 2, 2018

Federal Reserve chairman Jerome Powell gave investors reason to cheer on Wednesday when he suggested that the Fed may slow down its interest rate hikes.

Powell noted that rates remain relatively low and that they are just below what many economists consider "neutral for the economy - that is, neither speeding up nor slowing down growth".

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes.

Economists and investors have been scratching their heads this week over signals from the Federal Reserve, which left the future of U.S. monetary policy open to broadly divergent interpretations. On October 2, in a question-and-answer session on PBS, he said "extremely accommodative" interest rates had been needed in the past but they were "not appropriate anymore".

In the past, Powell has mentioned a number of looming risks to the economy, including the slowdown in global growth and the fading benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed's own rate hikes.

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Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish".

"There is a great deal to like about this outlook", said Powell on Wednesday. "All he is doing is pointing out an obvious idea", Porcelli wrote in a client note. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates".

On Wednesday, Powell also emphasised these uncertainties.

On Wednesday Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment and inflation near its 2 percent target. But signs of a slowdown overseas and almost two months of market volatility - including another 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. 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 behavior. While interest rates were gradually moving to a neutral point, "we're a long way from neutral at this point, probably". Daco said Powell's comments - coupled with comments from Fed vice chair Richard Clarida on Tuesday - show a "growing desire by the Fed to move the landing zone for the federal funds rate, and signal less cumulative tightening ahead".

According Reuters, nearly all Federal Reserve officials at their last meeting agreed another interest rate increase was "likely to be warranted fairly soon", but also opened debate on when to pause further hikes and how to relay those plans to the public. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said. Oxford Economics now predicts a single increase in 2019 while JP Morgan and Goldman Sachs see four. On that basis, there has been some criticism of Trump for his attacks on its policies.

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