Published: Sat, December 01, 2018
Money | By Bruce West

Shares get uplift from dovish Fed comments

Shares get uplift from dovish Fed comments

With the Federal Reserve expected next month to raise rates to what some US central bankers believe is at or near a neutral level, Chairman Jerome Powell is retuning his message to signal a more cautious approach on further rate hikes next year.

The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the U.S. dim the appeal of risky assets.

"Westpac is forecasting rates will rise in December, and this will be followed by 3 further rate hikes in 2019".

Karim Basta, chief economist at III Capital Management, said recent market volatility showed toning down the neutral rate debate was the way forward.

"We also know that the economic effects of our gradual rate increases are uncertain and may take a year or more to be fully realised", he said, adding that there was "no preset policy path".

But minutes from the Fed's November 7-8 policy-setting meeting, released on Thursday, as well as remarks over the last two weeks, point to a reassessment of the Fed's longstanding promise of "further gradual rate increases" that would extend two years of almost uninterrupted quarterly tightening.

Mr Powell's nuanced comments eased investor concerns about 2019.

Kashkari said he was "more worried" about that the Fed raises rates "prematurely" when the job market "has slack" and the wage growth hasn't picked up yet.

The Fed has raised rates three times this year and has been saying the economy is in strong shape.

A few participants also expressed reservations about the timing of the next rate hike, suggesting that the benchmark rate - which determines the cost of borrowing on credit cards, mortgages and other loans - may now "be near its neutral level" and "further increases" could slow down the economy's expansion.

Jerome Powell, chairman of the Fed said on Wednesday that the 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".

"There is a lot of data to come between now and March, the most likely next opportunity for a rate hike". While the potential for an escalation in tit-for-tat tariffs with China could "slow economic growth more than expected", others noted.

"Powell is not suggesting that since they are just below the range they may stop soon. 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".

"What do you do?" said Powell in NY.

Minutes of the November meeting show policymakers ticking off a series of issues, including a tightening of financial conditions, global risks, "and some signs of slowing in interest-sensitive sectors", that had begun weighing on their view of the economy. Three of those increases have been under Powell.

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

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. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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