Powell: US economy healthy and rate hikes aren't automatic

Image Tim Arbaev iStock

Image Tim Arbaev iStock

Speaking at the Economic Club of NY on November 28, Jerome Powell outlined the Fed's decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation's financial stability. It indicated that the Fed is not committed to further rate increases next year and is very attuned to their demands, despite official claims that its policies are set by the state of the economy not the markets.

Claiming that benchmark lending rates were "just below" a range of estimates for "neutral", that is, neither stimulating nor slowing growth, Powell sent a signal that markets took to mean the Fed might ease off on raising rates in 2019.

Tucked in his speech, Powell said that rates are "just below" the so-called neutral range, the level that central bankers believe will neither accelerate nor slow economic growth - a subtle two-word shift from comments he made in October suggesting that interest rates are still "a long way" from neutral. From the Fed's perspective, the interest rate hike in December will probably lead to an interest rate level that will no longer justify the automatism of a quarterly interest rate hike. Stocks swooned on those remarks as investors bet the US central bank would need more rate hikes to prevent the economy from overheating.

But policymakers also say they may soon begin to give the public fewer clues about their plans, striking language from future statements about "further gradual increases" and instead keeping a close eye on developments in the economy.

Most of the money from the tax cuts has been devoted to finance share buybacks, further boosting the wealth of the financial oligarchy, not to undertake expansion in the real economy.

The minutes of a meeting of the US Federal Reserve earlier this month show that nearly all officials expect an additional interest rate hike next month. The president argued that the Fed is hurting the USA economy by raising interest rates.

Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates.

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In its most recent projections, the Fed forecast that it would raise rates in December for the fourth time this year, followed by three more hikes in 2019.

"Powell took pains to state that the FOMC's rate projections are based on their best assessments of the economic outlook", Kevin Logan, chief U.S. economist for HSBC wrote in a Wednesday note to clients, referring to the policy-setting Federal Open Market Committee. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates". The FOMC is likely to link future interest rate decisions more closely to incoming data and then decide on a case-by-case basis. Daco said Powell's comments - coupled with comments from Fed vice chair Richard Clarida on Tuesday - show a "growing desire by the Fed to move the landing zone for the federal funds rate, and signal less cumulative tightening ahead".

And Powell repeated the view that the current level - at 2.25% - is "just below" the estimate of neutral, a rate that neither stimulates nor restrains the economy.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said. Those increases have raised its benchmark rate to a still-historically-low range of 2 per cent to 2.25 per cent.

The central bank chief said his colleagues and many other economists "are forecasting continued solid growth, low unemployment and inflation near 2 per cent".

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

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