Published: Sat, December 01, 2018
Business | By Eloise Houston

Fed's Powell signals interest rates near neutral in speech

Fed's Powell signals interest rates near neutral in speech

US FEDERAL Reserve chairman Jerome Powell gave investors a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy US economy.

Federal Reserve Chairman Jerome Powell ignited a market rally Wednesday by saying interest rates are "just below" broad estimates of a level considered neutral, a setting created to neither speed nor slow economic growth.

Federal Reserve officials signalled they're adopting a more flexible approach in their gradual interest-rate increases after a likely December hike, as they try to sustain a United States expansion that may become the longest on record next year.

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

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 current system relies on the Fed paying interest on some reserves to set the federal funds rate.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients.

The rate hike likely coming on December 19 would raise the benchmark lending rate, which influences borrowing costs throughout the wider economy, to 2.5 per cent.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce". Many investors read the remarks as signalling the Fed's three-year tightening cycle was drawing to a close.

The Fed official believed that the central bank should pause on rate increases at this point, as US short-term interest rates are "close to neutral".

Minutes of the November 7-8 meeting of the Fed's rate-setting body, the Federal Open Markets Committee, show 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. Powell, who took over as Fed chairman in February, has said he wants to provide the public with "plain English" descriptions of what the central bank is up to.

But he cautioned that things could turn out a lot differently than the Fed expects. Investors interpreted his remarks as evidence that the Fed might consider pulling back from quarterly rate hikes.

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly. We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilising financial imbalances. Three of those increases have been under Powell.

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", Mr. Powell said.

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