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

Andrew Cummings
December 1, 2018

Rates "are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy", he added.

The Fed said that nearly all of its policymakers agreed that "a gradual approach to policy normalization remained appropriate" in its newly released minutes of the Federal Open Market Committee (FOMC) meeting which was held from November 7 to November 8. This should be clarified at the next meeting on December 18-19.

An expected December rate increase was further cemented into place.

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.


Market reaction reflected investors' fears the Fed might end up making the kind of mistake Powell talked about - tightening policy too much because of a false read on where neutral is, at a time when clouds had begun to form on the economic horizon.

The Fed has settled into a quarterly rate-hike cycle and is still expected to raise rates again next month, in what would be the fourth hike this year. The fear of higher USA interest rates - fuelled by a surging economy - has been a key driver of a global equity sell-off over the past few months, while the dollar has soared as traders put cash into the USA looking for better, safer returns. Rather, we assume that Powell wanted to prepare the markets for a change in the central bank's communication.

Investors welcomed his remarks because they appeared to retreat from a comment he made in early October describing the Fed's benchmark rate as a "long way" from a neutral level - which implied to some listeners that Mr. Powell planned to keep raising rates for a while.

But, wait: Didn't the head of the Fed just give investors optimism that it was nearing its comfort zone for the cost of cash - its so-called neutral rate? "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing", he was quoted as saying in the report.


"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".

The dollar, which has outperformed bonds and the benchmark S&P 500 stock index this year amid rising interest rates and safe-haven flows triggered by global trade tensions, was modestly higher.

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.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY. This gap, which measures expectations on rate increases in the next year, has narrowed to 23 basis points, indicating that traders are not penciling in more than one increase in 2019, although the Fed's median projections still point to three increases next year.


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.

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