Fed officials express caution about pace of future hikes

Eileen GuzmanDec 01, 2018

While the central bank is widely expected to lift rates, his comment was a far cry from his characterisation last month of them being "a long way from neutral".

Some market analysts treated such remarks as an indication of a possible pause in rate hikes, since the neutral rate could be used to decide a target area for the central bank to complete its normalization cycle.

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.

"So far, I'm not even a little bit happy with my selection of Jay", the president told the Washington Post in an interview.

The minutes and Powell's comments did have one thing in common, they both signaled a December interest rate hike. But signs of a slowdown overseas and almost two months of market volatility have clouded an otherwise mostly rosy United States picture in which the economy is growing well above potential and unemployment is lowest since the 1960s. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

The Fed's current pattern of raising rates gradually - roughly once a quarter over the past two years - is an effort to balance two risks.

"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".

The transition comes as the Fed's target policy rate, left at 2 percent to 2.25 percent in November, grinds closer to the 2.5 percent to 3.5 percent range of Fed officials' views of where a rate that neither boosts nor cools a healthy economy lies.

But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes.

Powell also underscored the importance he places on communicating the Fed's thinking in a way that people will understand.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients. 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. "However, market pricing implies that while the Fed is likely to hike in December (about 80% priced), it will move only once in 2019". And neither should investor expectations about the Fed's future work. Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

He said then that growth overseas was likely to weaken and that USA fiscal stimulus, which had goosed consumption, would soon fade.

"We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilizing financial imbalances".

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