Federal Reserve appears more cautious on interest rate hikes next year

Federal Reserve appears more cautious on interest rate hikes next year

Federal Reserve chairman Jerome Powell has opened the door for a potential pullback in projected United States interest rate hikes for 2019 following a widely expected increase in December.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth", Powell said while speaking at the Economic Club of NY. 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. His remarks Wednesday appeared to suggest to this audience that he might stop sooner or move more slowly.

The general consensus is that a rate hike in December will most certainly occur as the CME Group's FedWatch Tool, an algorithm that calculates the probability of a rate hike in a given month, is now showing an 82.7% chance the Federal Reserve will institute a fourth rate hike to end 2018.

In October 2015, when the Yellen Fed was navigating the hard transition from years of super-low interest rates to a cycle of rate hikes, she got the worst grade of her tenure - an average 2.27 out of 5. After mid-year, Ashworth said he expects that "a slowdown in economic growth to below potential forces (the Fed) to the side lines".

His comments were interpreted by many investors as a signal that the Fed's three-year tightening cycle is drawing to a close.

The possibly dovish shift in language on Wednesday came as US President Donald Trump stepped up attacks on Mr Powell, criticising the Fed's rate hikes as undercutting his economic and trade policies.

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On Thursday, the Fed's Open Market Committee published the minutes of a meeting in early November.

But he cautioned that things could turn out a lot differently than the Fed expects.

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly. "As you get closer you tack a little bit more". "Bloomberg Economics does not take it as a signal of the Fed dialing back on the number of expected rate hikes, but rather as an intent to be more flexible in setting policy as they approach the neutral rate". 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. Rather, we assume that Powell wanted to prepare the markets for a change in the central bank's communication. "I think that's what we've been doing".

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added. Three of those increases have been under Powell.

As a result, "almost all" Fed members said a rate hike "was likely to be warranted soon".

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

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