US Fed official urges pause on rate hikes with inflation under control

Virginia Carson
December 1, 2018

U.S. Federal Reserve (Fed) said on Thursday that nearly all Fed policymakers expected another interest rate hike "likely to be warranted fairly soon".

"The health of the economy gradually but steadily improved, and about three years ago the [Fed] judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates", he said. And the headline unemployment rate drops further. To date, markets have considered quarter-end meetings in March, June, September and December as "live" meetings that result in rate changes.

"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.

The minutes said that such a change would help to convey "the Committee's flexible approach in responding to changing economic circumstances", while market supposed that this could indicate possible changes for the Fed's rate hike decisions in 2019.

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Hong Kong - The dollar extended losses in Asia while equities rallied after the head of the Federal Reserve hinted at a softer pace of interest rate hikes, though investors remain wary about the weekend's crunch trade talks between Donald Trump and Xi Jinping.

The Fed members' comments initially appeared to comfort investors.

His renewed focus on the "neutral" level of interest rates as a potential turning point for policy that until now has been on a steady tightening path is echoed by the minutes. "We continue to see the risks around economic growth skewed to the upside based on trends borne out in the data".

Market participants interpreted that as a dovish signal for future rate hikes, compared with Powell's previous remarks in early October that rates were "a long way" from neutral, a level neither stimulative nor restrictive to the economy.

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Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy. "As you get closer you tack a little bit more".

"Interest 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, that is, neither speeding up nor slowing down growth", Mr Powell told the Economic Club of NY. 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. "I think that's what we've been doing". Three of those increases have been under Powell.

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added.

On Wednesday, Jerome Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view the Fed will have to be especially responsive to the data.

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One challenge for the Fed is that officials aren't sure where a neutral rate actually lies. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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