Fed likely to raise rates in December but concerns mounting: minutes

Jermaine Castillo
December 1, 2018

Federal Reserve Chairman Jerome Powell speaks at the Economic Club of New York's luncheon in New York November 28, 2018.

Powell said that "there is no preset policy path" for future rate hikes and the current level for the Fed's benchmark rate was very close to "neutral", the point where the Fed is neither stimulating economic growth or slowing growth.

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes.

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

It was a "rookie mistake, " Omair Sharif, senior USA economist at Societe Generale, said Wednesday in a note to clients.

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If the Fed, as expected, raises the fed-funds rate next month to a band between 2.25% and 2.5%, that would leave it touching the bottom of the range of neutral estimates but four more quarter-percentage-point increases from the top.

Earlier in November, Powell was optimistic about the state of the economy, citing strong annual economic growth exceeding 3 percent and unemployment at a near five-decade low of 3.7 percent. "As you get closer you tack a little bit more".

It is not clear whether the idea of perhaps nudging rates above neutral, as he had earlier suggested, is still on the table, or if it means he expects fewer rate hikes, or even a pause.

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?

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.

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While numerous Fed watchers saw the remarks as nothing new, many investors heard it as a signal that the central bank was far from finished raising interest rates.

His clarification Wednesday didn't otherwise indicate any substantive change in the Fed's policy plans.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected a year ago to oversee the world's most powerful central bank a "threat". Bloomberg Economics anticipates three increases. 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 destabilising financial imbalances.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

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