ibusinesslines.com December 17, 2018

Fed retunes message for 2019, opening door to 'slow down'

01 December 2018, 05:26 | Kelvin Horton

Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez

Was Post Fed Chair Speech Rally a Market Overreaction

But Fed officials also raised the prospect they could slow plans to raise rates next year, and discussed how to signal to investors that they would stay flexible "in responding to changing economic circumstances".

Powell, in remarks just two weeks ago, had listed three possible challenges to growth in 2019: slowing demand overseas, fading fiscal stimulus at home and the lagged economic impact of the Fed's past rate increases.

In what was seen as a shift in tone from remarks last month, Powell said Wednesday that the Fed's series of rate increases had brought policy to "just below" the range of estimates of neutral, where it neither spurs nor restricts the economy. That could fall to two when officials update those forecasts at their December 18-19 meeting, Wrightson ICAP LLC chief economist Lou Crandall said.

Analysts at Westpac explain that the U.S. equity markets like the fact that the Fed Chairman Powell appears open to a slower pace of monetary tightening.

The need for "further gradual rate increases" as appropriate to keep the current recovery on track has been a staple of recent Fed policy statements as the central bank nudged rates back toward more normal levels after a decade near zero.

"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said. Futures showed the amount of tightening priced in for 2019 slipped to 25 basis points - equivalent to just a single rate hike.

Powell was cited in the minutes as saying that "it might be appropriate to implement another technical adjustment in the IOER rate relative to the top of the target range for the federal funds rate fairly soon". We think this is the wrong interpretation. "There's no question about that".

"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce". 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.

A few officials expressed concern about rates moving too high too quickly. Home sales, vehicle sales, business investment and other parts of the economy that are sensitive to interest rates have begun to soften, evidence that the Fed's eight rate increases since 2015 are changing household and business behaviour.

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.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon on Wednesday.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said. That would bring it about to the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 percent to 3.5 percent.

With a December increase broadly expected, that meeting may stand out more for the fresh economic projections that policymakers will issue, providing a clearer view of how their perceptions of the economy and the proper path for rates may have changed in recent weeks.

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