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

Was Post Fed Chair Speech Rally a Market Overreaction

Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez

Federal Reserve Chairman Jerome Powell ignited a market rally Wednesday by saying interest rates are "just below" broad estimates of a level considered neutral, a setting created to neither speed nor slow economic growth.

The change comes months after Powell indicated plans to raise interest rates and cool down the U.S. economy, moves that run counter to President Donald Trump's expansionary moves, including last year's tax cuts.

Those remarks sparked a rally in stock and bond markets, while sending the dollar lower. That could fall to two when officials update those forecasts at their December 18-19 meeting, Wrightson ICAP LLC chief economist Lou Crandall said. Some want to see evidence that job growth is slowing, holding the unemployment rate at its current low levels, before they pause rate increases.

Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year. But Powell's comments are prompting speculation among many investors that a looser policy may lie ahead.

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. This is probably because Fed Chair Jerome Powell stole most of the thunder the day before with his dovish remarks about the fate of future rate hikes.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected previous year to oversee the world's most powerful central bank a "threat".

The hikes have prompted a flood of criticism from President Donald Trump, who has repeatedly attacked the Fed and Powell personally.

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Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 per cent - in early October, just after Mr Powell had sounded a quite confident tone on the economy.

"What do you do?" said Powell in NY. "Not even a little bit. 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.

But other participants preferred a wait-and-see approach, noting that the future held "upside" and "downside" risks, such as slowing global growth on one hand and faster inflation on the other.

"There is a great deal to like about this outlook", said Powell on Wednesday.

Policy makers provisionally penciled in three quarter-percentage-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

The minutes flagged the possibility that the Fed will make another adjustment to maintain control of the policy rate, by adjusting the separate interest rate on excess reserves, or IOER, which is now set at 5 basis points below the upper bound of the federal funds target range.

Although a December rate hike has been widely expected, the Fed's path next year has been more uncertain, with investors last month expecting even three rate hikes in 2019.

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