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Powell Opens Door to Possible Pullback in Fed Rate-Hike Outlook

01 December 2018
Powell Opens Door to Possible Pullback in Fed Rate-Hike Outlook

Powell offered few further clues on how much longer the U.S. central bank would raise interest rates in the face of a slowdown overseas and market volatility at home.

The minutes showed nearly all Fed members agreeing that another rate increase was "likely to be warranted fairly soon", but also ticked off a series of issues that had begun weighing on their view of the economy.

"Participants also commented on how the Committee's communications in its post-meeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rates", the minutes said.

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

Harvard professor of economics Martin Feldstein discusses why the Federal Reserve should continue to raise interest rates.

Speaking to the Economic Club of NY, the Fed chairman also said that while some corporate debt loads have reached riskier levels, "we do not see unsafe excesses in the stock market".

A "significant fall" in asset prices would make it more costly for nonfinancial businesses, which are already highly leveraged, to obtain funding, the Fed cautioned.

Some have speculated that Trump might try to oust Powell, who was his hand-picked choice to lead the Fed.

Fed Chair Powell gave markets a nudge yesterday evening suggesting that the current level of rates is just below the broad range of estimates of the level that would be neutral for the economy.

Fed officials have indicated for some time that they plan to keep raising rates until they reach a "neutral" point, neither slowing down nor boosting economic growth.

He said of Mr Greenspan, who had originally been appointed by Ronald Reagan in 1987: "I reappointed him and he disappointed me". A full term on the seven-member Fed board lasts 14 years - a lengthy period that was seen as liberating Fed officials from any fear that their rate decisions might cost them their jobs.

In his speech to the New York Economic Club, Powell again stressed that there was "no preset policy path" for interest rates and said the central bank had moved gradually, since "moving too fast would risk shortening the expansion".

"It's important to distinguish between financial market volatility and events that threaten financial stability", he said. Hence, the Fed meet on December 18-19 would be crucial in understanding further if there is a course correction.

Trump on Tuesday (Nov 27) again blasted his hand-picked chief of the United States central bank, saying the Fed was "way off base" and the rate hikes undermined the work he was doing to juice the U.S. economy. And Narendra Modi, the Indian prime minister, has recently launched a series of attacks on the Reserve Bank of India for raising interest rates too quickly. The dot plot (see chart below) suggested higher conviction for a December rate hike and three rate hikes in 2019. The mere hint of fewer rate hikes in 2019 was enough to ebb the stock sell-off for at least one day last week.