Federal Reserve appears more cautious on interest rate hikes next year

Powell defends Fed charge hikes amid Trump onslaught			 0					By		Marta Subat

Powell defends Fed charge hikes amid Trump onslaught 0 By Marta Subat

Nearly all Federal Reserve officials at their last meeting agreed another interest rate increase was "likely to be warranted fairly soon", but also opened debate on when to pause further hikes and how to relay those plans to the public.

The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the United States dim the appeal of risky assets. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates".

The Fed held rates steady at its November meeting, and made no mention in its statement after that session about the sharp sell-off in equity markets in the weeks before it.

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

That "just below" phrasing seemed to indicate that the Fed is almost done raising rates for the time being.

Powell's comments sparked a surge in a stock market that had struggled of late and came in the wake of repeated criticism of the Fed's rate increases by President Donald Trump.

The Fed members' comments initially appeared to comfort investors. "We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note. Stocks swooned on those remarks as investors bet the USA central bank would need more rate hikes to prevent the economy from overheating. While the potential for an escalation in tit-for-tat tariffs with China could "slow economic growth more than expected", others noted. That suggested to many investors that fewer rate increases might be on the way. 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.

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Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy.

"What do you do?" said Powell in NY. "Not even a little bit".

The dollar, which has outperformed bonds and the S&P 500 this year, benefiting from rising interest rates and safe-haven flows triggered by global trade tensions, fell back after Powell spoke.

The minutes of the November meeting showed Federal Open Market Committee policymakers had on their agenda a series of issues, ranging from a tightening of financial conditions, global economic risks, "and some signs of slowing in interest-sensitive sectors", that had begun to sway their assessment of the economy. Bloomberg Economics anticipates three increases.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.

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

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

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