Why Did Fed Chairman Jerome Powell Back Off on Rate Hikes?
30 November, 2018, 18:38 | Author: Eric Barnett
The words prompted traders and analysts to revise their latest economic forecasts that predicted the Fed might raise rates in December for the fourth time this year before approving a further three rate hikes next year.
That stood in contrast with comments Powell had made in October when he said that the Fed's policy rate was still a "long way from neutral".
However, central bankers have never signaled they intend to stop raising rates once they hit neutral - which is a moving target and subject to debate. That appeared to signal that while the Fed may raise interest rates again next month, it isn't overly concerned about inflation, assuaging fears among many investors that rates will continue to climb for the foreseeable future.
The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the USA dim the appeal of risky assets.
United States stock markets jumped following the comments, as investors interpreted them to mean the central bank was close to the end of its tightening cycle, which has seen eight rate increases since December 2015 following the global financial crisis.
The rate increases have gradually raised borrowing costs for consumers and businesses.
"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.
Dollar weakens as cautious Fed leads to rate-hike rethink
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.
"Neutral" means the rate neither stimulates nor drags on economic growth.
Powell has dismissed the unprecedented political attacks from Trump, saying they have no influence on deliberations of the independent central bank. The law creating the Fed says such officials can be "removed for cause".
Powell said that the outlook for the US economy remains solid and that interest rates are almost within a "neutral" range.
In recent weeks, President Donald Trump has repeatedly attacked the Fed - and Powell personally - for their rate increases, which the president has blamed for any economic weaknesses or stock market turmoil.
In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes. And Narendra Modi, the Indian prime minister, has recently launched a series of attacks on the Reserve Bank of India for raising interest rates too quickly. "We already passed that, as the housing market shows", he said on CNBC, referring to this year's steady decline in home sales and construction - something analysts partly blame on higher mortgage rates. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020. 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.
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