Powell: US economy healthy and rate hikes aren't automatic

Alicia Cross
December 1, 2018

"Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon, " assuming the economy performs in line or stronger than their expectations, the central bank said in the minutes of its November 7-8 session released in Washington Thursday.

His remarks were a departure from comments he made at the beginning of October, stating the interest rates were a "long way from neutral". His predecessors took care not to directly attack the central bank's rate policy out of concern that such criticism could backfire. That appeared to signal that while the Fed may raise interest rates again next month, it isn't overly concerned about inflation, assuaging fears among many investors that rates will continue to climb for the foreseeable future. "From a financial stability perspective; however, today we do not see unsafe excesses in the stock market".

The Fed has raised rates three times this year and has been saying the economy is in strong shape.

The basket has rallied from a low of just under 88 in February this year and now trades at 96.20, just off its recent 1near 18-month high at 97.16.

Powell said in a speech in NY that interest rates remained "low by historical standards" and still provided stimulus to the economy. He tried to dismiss as premature questions over whether the Fed would need to raise rates above neutral to a level aimed at slowing growth.

Powell noted the word "bubble" wasn't mentioned in the report, though he said some asset prices, such as corporate debt, were high relative to the past.

The possible policy shift occurred at a meeting at which the Fed also resumed debate on how best to manage short-term interest rates in the future, a decision that could influence the final target size of the Fed's still-massive balance sheet.

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Referring to the Fed's gradual increases in its benchmark rate, Powell said, "there is no preset policy path".

Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 percent annual price increases.

Many economists also worry about potential economic damage caused by President Donald Trump's trade conflicts with China and other nations.

"We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note. 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.

While the speech had "cleaned up after Powell's sloppy language last month", markets may have reacted too strongly to the comments, said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

In an interview with The Washington Post, Trump said the Fed was "way off base". The December 2019 contract has effectively removed a full quarter-percentage-point Fed hike by that time.

Policy makers provisionally penciled in three quarter-percentage-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

Other reports by Free-Prsite

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