Fed's Powell, in apparent dovish shift, says rates near neutral

Andrew Cummings
November 30, 2018

Tensions over trade, the turbulent Brexit discussions and trouble in China and emerging markets could rock a United States financial system where asset prices are "elevated" and business credit quality may be "deteriorating", the Federal Reserve said in a first-ever report devoted to financial stability.

Powell said in a speech in NY that interest rates remained "low by historical standards" and still provided stimulus to the economy. Critics have expressed worry that the president's attacks threaten the Fed's ability to operate free of political pressure. 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. The law creating the Fed says its officials and those of other independent agencies can be "removed for cause" by a president.

The central bank is expected to raise rates once more next month, bringing the total to four this year.

But Fed members agreed they would offer fewer signals about the future in their public statements, insisting, as Mr Powell did this week, that they would instead monitor economic data and respond accordingly. I'm doing deals and I'm not being accommodated by the Fed. "They're making a mistake because I have a gut, and my gut tells me more sometimes than anybody else's brain can ever tell me".

On Tuesday, Trump tweeted that he was "not even a little bit happy" with Powell. His predecessors in the White House took care not to directly or publicly attack the central bank's rate policy. Eurodollar futures pricing reacted to Powell's comments, reflecting even firmer expectations that the Fed will hike only once next year.

"What a difference having a written and carefully vetted speech makes with respect to speaking freely and without a script, " Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington, told clients on Wednesday.

Trump has complained that the Fed is threatening to undo the economic stimulus being provided by the tax cuts and that its rate hikes are unnecessary because inflation has remained relatively low.

"Powell said nothing to suggest that he or the majority of the FOMC think they'll be able to stop at the bottom of the range, after just one more hike", said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Trump tapped Powell a year ago to be Fed chairman after he decided against giving Janet Yellen a second term. Any slowdown or pause in the Fed's rate hikes would be welcome news for a stock market that's been battered by fears that the Fed's continued credit tightening could end the long bull market.

The November jobs report is due out Friday. He subsequently put pressure on Burns to keep interest rates down in the hope that unemployment would remain low in the run-up to the 1972 presidential election.

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.

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