Published: Sun, December 02, 2018
Business | By Eloise Houston

US Fed says another rate hike "likely to be warranted fairly soon"

US Fed says another rate hike

Powell's dovish comments mean the probability of accelerated pace of rate increases in the U.S. is rather low, and that should burnish the appeal of all emerging market assets.

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.

Powell said in a speech in NY that interest rates remained "low by historical standards" and still provided stimulus to the economy.

This week, a speech by Jerome Powell, the chairman of the US Federal Reserve, triggered strong price swings in financial markets.

The Fed has settled into a quarterly rate-hike cycle and is still expected to raise rates again next month, in what would be the fourth hike this year.

But policymakers also say they may soon begin to give the public fewer clues about their plans, striking language from future statements about "further gradual increases" and instead keeping a close eye on developments in the economy. But turning to financial stability, the main topic of his speech, he added, "We know that things often turn out to be quite different from even the most careful forecasts".

Minutes released yesterday from the Fed's November 7-8 policy meeting showed disagreements about the path of interest rates, with some policymakers worrying that tightening too fast could stem economic growth.

She said the market interpreted his comments as dovish, meaning rates won't move substantially higher, or even that the US central bank may take a pause in early 2019 after its expected increase next month.

Powell said that the outlook for the USA economy remains solid and that interest rates are almost within a "neutral" range.

With last year's deep tax cuts and fiscal stimulus from Congress, the world's largest economy continues to hum, producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed's two percent target.

"Powell took pains to state that the FOMC's rate projections are based on their best assessments of the economic outlook", Kevin Logan, chief USA economist for HSBC wrote in a Wednesday note to clients, referring to the policy-setting Federal Open Market Committee. While interest rates were gradually moving to a neutral point, "we're a long way from neutral at this point, probably". Daco said Powell's comments - coupled with comments from Fed vice chair Richard Clarida on Tuesday - show a "growing desire by the Fed to move the landing zone for the federal funds rate, and signal less cumulative tightening ahead".

"Powell said nothing to suggest that he or the majority of the FOMC think they'll be able to stop at the bottom of the range, after just one more hike", said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation.

The Fed raised its benchmark rate in March, June and in September, with the last increase putting it in a range of 2 percent to 2.25 percent.

In his speech Wednesday, Powell spoke directly to the stock market volatility and somewhat downplayed the recent action. Some analysts are now saying the Fed may decide to raise rates only once or twice in 2019.

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