Published: Mon, December 03, 2018
Money | By Bruce West

Fed minutes: Further interest rate hike 'warranted soon'

Fed minutes: Further interest rate hike 'warranted soon'

Yields on shorter-dated USA government bonds fell on Wednesday afternoon, steepening the yield curve, after Federal Reserve Chair Jerome Powell delivered a speech in which he signaled that an end to the bank's interest-rate hike cycle may be closer than previously suggested.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy, that is, neither speeding up nor slowing down growth", Mr Powell told the Economic Club of NY.

The downgrade is at least partly attributable to Powell's remark on October 3 that interest rates were probably a "long way" from neutral, which seemed to contradict his comment a couple of months earlier rejecting a too-rigid reliance on the neutral rate to shape policy because it could lead to costly mistakes.

Participants discussed the need to change the statement's wording to more sharply emphasize that future policy decisions would be based on incoming economic data.

Many Fed officials still believe more rate increases will be needed to prevent the economy from overheating.

There was no "preset policy path", Powell said.

In the question period after his speech Wednesday, Powell sidestepped an inquiry about whether the next recession would likely caused by instability in the financial sector, such as a sharp drop in stock prices triggered by rising rates. Some analysts are now saying the Fed may decide to raise rates only once or twice in 2019.

Powell's comments came as speculation was already mounting that the USA central bank might considering pausing its hiking cycle amid slowing global growth and increased market volatility.

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".

Mr. Powell repeated a relatively upbeat view of the economic outlook, including low unemployment and stable inflation.

"Powell's comments suggest that 2019 may be more of a wait-and-see approach and the assumption of any hikes may be premature", said Tai Wong, head of metals trading at BMO. "Our gradual pace of raising interest rates has been an exercise in balancing risks".

"We know that moving too fast would risk shortening the expansion", Mr. Powell said.

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added.

Mr. Powell flagged rising indebtedness and deteriorating loan quality among some USA businesses as top vulnerabilities within the US financial system, but otherwise described such risks as moderate. He expects the Fed chairman was simply correcting a "rookie mistake" from last month, which at the time drove a spike in Treasury yields and a stock-market sell-off.

The phrase "just below" neutral might seem bland or innocuous. But he warned that any corporate debt buildup now could make the next recession more severe.

"Several dealers noted that recent communication from Fed officials has been clear".

Like this: