Wednesday, 12 December, 2018

US Fed official urges pause on rate hikes with inflation under control

Was Post Fed Chair Speech Rally a Market Overreaction Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez
Jodi Jackson | 01 December, 2018, 12:57

Federal Reserve Chairman Jerome Powell, faced with escalating attacks by President Donald Trump, defended the central bank's move to gradually raise interest rates, saying the policy is necessary after almost a decade of historically low rates.

Chairman Jerome Powell's Wednesday speech to the Economic Club of NY was hardly as hawkish as some had expected. But the path after that is clouded after Chairman Jerome Powell said Wednesday rates are "just below" estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments. Rather, we assume that Powell wanted to prepare the markets for a change in the central bank's communication.

In remarks delivered two weeks ago on a late evening in Dallas, Powell refined his summertime message, explaining that just as someone in a room where the lights suddenly go out must "slow down" to avoid running into furniture, the Fed must do the same when nearing neutral to avoid missing signals from economic data.

European shares inched up on Thursday as dovish comments from Federal Reserve Chairman Jerome Powell helped offset uncertainty over a possible escalation in the US/China trade dispute.

Minutes released yesterday from the Fed's November 7-8 policy meeting showed disagreements about the path of interest rates, with some policymakers worrying that tightening too fast could stem economic growth.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients. Since a September news conference when he painted a rosy picture of where things stood, some economic indicators have softened; others, such as wage growth, have firmed, leaving the Fed for the first time in a long time pulled in different directions.

Nearly all Fed officials at the 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. Yet in the two most recent United States hiking cycles, gold has risen even as equities climbed because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value, said Adrian Ash, research director at London-based BullionVault Ltd.

The FOMC also discussed how best to manage short-term interest rates in the future. The two-year Treasury yield-most reflective of the Fed rate policy-fell to 2.79% after an earlier high of 2.85%.

"Powell is not suggesting that since they are just below the range they may stop soon".

The central bank expects the unemployment rate to remain historically low next year.

Mr Powell's nuanced comments eased investor concerns about 2019. To date, markets have considered quarter-end meetings in March, June, September and December as "live" meetings that result in rate changes.

"If people get a sense that unemployment's going up, heaven forbid, we're going to see great volatility in 2019", Weston said by phone on November 29. "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing".

"Our gradual pace of raising interest rates has been an exercise in balancing risks", Mr Powell said. Bloomberg Economics anticipates three increases. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.

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