Fed interest rate hikes appear on course after chair Jay Powell's address

Jermaine Castillo
August 27, 2018

The Fed has been coming to Jackson Hole since 1981.

But Powell's remarks will be watched even more closely after Trump, who has flouted established norms throughout his presidency, once again broke protocol this week by publicly criticising Powell for raising interest rates.

A strong economy and robust corporate results have supported investment appetite for equities.

More importantly, Powell's take on inflation has likely alleviated fears of faster policy tightening.

At the same time, Powell said that in case of another financial crisis or intensified concern about high inflation, "We will do whatever it takes". Still, central bankers have shown patience, raising rates at a careful pace while inflation has slowly moved higher.

On Wall Street, the Dow Jones Industrial Average rose 139.04 points, or 0.54 percent, to 25,796.02.

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The highly anticipated Jackson Hole conference will also give Powell his first chance publicly to respond to Trump, who this week said he disagrees with the Fed's decision to raise interest rates and should instead focus on "what's good for the country". But there was a fresh item on the agenda: what is the new man at the Fed like and will he capitulate to the pressure the president of the United States is putting on him?

Mazen Issa, senior FX strategist at TD Securities in NY, said Powell's remarks built on a stance seen in the minutes of the Fed's latest policy meeting released on Wednesday.

Trump believes that rate hikes would hinder economic growth and put a cap on the bullish US stock market.

With Powell sticking to his guns, "the news won't be welcomed by president Donald Trump", said Andrew Hunter, US economist at the consultancy Capital Economics. But the response was not an inflation hawk's defense of slowing the economy to hold down inflation.

"Overall, his speech did not signal any change in policy", Michael Pearce, senior USA economist at Capital Economics, wrote in a note.

"My colleagues and I are carefully monitoring incoming data", he said.

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Though Powell chose not to mention Trump's criticism, other Fed officials asserted that the president's complaints about rate hikes would have no effect on their policymaking.

The Fed has been slowly inching up its key interest rate because the USA economy is doing better.

He said the Fed's mistakes of the past, such as a misestimation of full employment that allowed inflation to take off in the 1970s, mean the central bank today should not assume its current estimates of those economic variables are precise.

The Fed's economic projections, compiled from estimates of all Fed officials, estimates the current neutral rate at 2.9 per cent. Powell defended the approach, noting "when unsure of the potency of a medicine, start with a somewhat smaller dose".

The chairman said bringing interest rates back toward levels the the Fed sees as neutral is the safest approach to managing an economy that has raised questions about the central bank's diagnostic tools for shaping monetary policy.

The Fed made two rate hikes so far this year, and is expected to make two more before the end of the year.

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Mr. Powell delivers his speech, titled "Monetary Policy in a Changing Economy", at 10 a.m. EDT.

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