Published: Fri, November 30, 2018
Business | By Eloise Houston

Fed Chairman Says Interest Rates Are Just Below Estimates of Neutral

Fed Chairman Says Interest Rates Are Just Below Estimates of Neutral

Federal Reserve officials are seemingly on track to raise a key interest rate in December, but they showed more caution in their most recent meeting and indicated the pace of future hikes might need to slow given emerging risks to the economy. His predecessors took care not to directly attack the central bank's rate policy out of concern that such criticism could backfire.

Interest rate-sensitive financials dropped 0.8 percent, as US 10-year Treasury yields continued to fall following the release of the Fed minutes. In his latest comments Tuesday, Trump blamed the Fed not only for the stock market's declines but also for General Motors' announcement this week of jobs cuts and plant closings.

Fed-funds and Eurodollar futures contracts have already been lowering their predicted path of short-term rates in 2019 in the past month or so, amid increased volatility in the stock and corporate credit markets and signs of weakness in interest-sensitive sectors such as housing. If the Fed is deterred from keeping rates too low for too long, the likely upshot will be a burst of inflation and interest rates that have to be raised aggressively later on to combat it, jeopardising growth and risking higher unemployment.

In an appearance earlier this month, Powell cited strong annual economic growth above 3 percent and unemployment at a near five-decade low of 3.7 percent. "I am pleased to say that our economy is now close to both of those objectives", Powell said in an appearance at the Economic Club of NY.

But many economists warn that by attacking the Fed for raising rates, Trump is actually putting pressure on the central bank to raise rates to demonstrate its political independence. The December CPI will be low and even negative and the rate of annual inflation will reach the lower range of the price stability target set by the government, which will signal a wait until the next rate hikes.

US Fed chairman hints at higher rates following Trump attack
Dollar weakens as cautious Fed leads to rate-hike rethink

"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and global financial markets and strains in institutions", according to the Fed report.

Many economists also worry about potential economic damage caused by President Donald Trump's trade conflicts with China and other nations.

Trump on Tuesday (Nov 27) again blasted his hand-picked chief of the USA central bank, saying the Fed was "way off base" and the rate hikes undermined the work he was doing to juice the U.S. economy.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump said. 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. 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.

Fed Powell dampens expectations, but multiple rate hikes remain on the table.

Like this: