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Fed's Powell signals interest rates near neutral in speech

01 December 2018
Fed's Powell signals interest rates near neutral in speech

Tucked in his speech, Powell said that rates are "just below" the so-called neutral range, the level that central bankers believe will neither accelerate nor slow economic growth - a subtle two-word shift from comments he made in October suggesting that interest rates are still "a long way" from neutral. Investors interpreted as Powell either changing his position on interest rates or attempting to correct the incorrect interpretation of his earlier remarks.

Investors say a sustained market rally following the summit would hinge on there being substantive concessions from Trump, in particular whether Xi can persuade Trump to postpone a sharp tariff hike on Chinese goods due to take effect January 1.

The current Federal Fund rate is 2.25 per cent, and there is a 77 per cent probability of a 25-basis point increase in the December meeting scheduled in the week before Christmas.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

"Bloomberg Economics does not take it as a signal of the Fed dialing back on the number of expected rate hikes, but rather as an intent to be more flexible in setting policy as they approach the neutral rate". This is probably because Fed Chair Jerome Powell stole most of the thunder the day before with his dovish remarks about the fate of future rate hikes.

Powell also revealed the economic growth coincides with inflation, and the Fed's annual goal of 2 percent interest rate increases.

After the release of the Fed's meeting minutes, traders of interest-rate futures stuck to their bets that the Fed would slow rate hikes next year, to just one.

Currently, the Federal Open Market Committee forecasts three quarter-point hikes for next year after a December increase, which is virtually guaranteed.

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

The hikes have prompted a flood of criticism from President Donald Trump, who has repeatedly attacked the Fed and Powell personally. And Powell's own communications plans to end each meeting with a news conference starting next year mean he needs a clear message for each meeting, starting next month. "You slow down. You maybe go a little less quickly". 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.

"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".

But policymakers may be divided over what to do after that, with some anxious raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.

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.