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 president has blamed the Fed for the steep two-month fall in the stock market and the possibility that his efforts to boost growth with a major tax cut will be thwarted by rising interest rates.
In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes. To date, markets have considered quarter-end meetings in March, June, September and December as "live" meetings that result in rate changes.
He said then that growth overseas was likely to weaken and that United States fiscal stimulus, which had goosed consumption, would soon fade.
"Powell's dovish pivot reduces nagging concerns about vigorous interest rate hikes while providing the market with one of the best holiday gifts, a significant bounce in global equity markets", said Stephen Innes, head of Asia-Pacific trade at OANDA.
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"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell", said Tom Porcelli, chief US economist at RBC Capital Markets. It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy. Why should he? The data for the USA economy remains strong. In language following that policy meeting, officials may convey "sufficient softening of future expectations", said Sprott's Reik, who's expecting the central bank to halt rate hikes next year.
Ironically, it was a reference to that guidepost that led to what in retrospect looks like a communication stumble, when stocks tumbled in early October after Powell's remark that interest rates were a "long way" from neutral and might even need to rise above that level.
Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates.
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. His emphasis on Wednesday suggested greater flexibility to stop sooner or move more slowly. That sets the ideal environment for the Fed to continue its slow increase of borrowing rates. But that approach is no longer appropriate, Powell said. "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.
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One challenge for the Fed is that officials aren't sure where a neutral rate actually lies.
Part of Powell's caution reflects inherent uncertainty over how the economy responds to interest rate increases. Three of those increases have been under Powell.
The minutes of the Fed's November 7-8 meeting showed that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.
The Fed is expected to increase rates again in December and has estimated three more increases might be necessary next year.
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