Published: Sat, December 01, 2018
Markets | By Jeffery Armstrong

Powell Opens Door to Possible Pullback in Fed Rate-Hike Outlook

Powell Opens Door to Possible Pullback in Fed Rate-Hike Outlook

His remarks were a departure from comments he made at the beginning of October, stating the interest rates were a "long way from neutral". Earlier this week the Bank of Israel Monetary Committee raised Israel's key rate from its historic low of 0.1%, where it has been anchored since March 2015, to 0.25%, its first rate hike since June 2011.

In its report, the Fed warned that markets and financial firms will need to continue to adjust to plans for future rate hikes after years of low interest rates following the financial crisis. But signs of a slowdown overseas and almost two months of market volatility - including another sharp selloff last week - have clouded an otherwise mostly rosy US picture in which the economy is growing well above potential and unemployment is the lowest since the 1960s.

A "significant fall" in asset prices would make it more costly for nonfinancial businesses, which are already highly leveraged, to obtain funding, the Fed cautioned.

Trump has grown increasingly critical of Powell in recent months.

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

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Powell also revealed the economic growth coincides with inflation, and the Fed's annual goal of 2 percent interest rate increases.

"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.

Compared with his recent predecessors, Mr. Powell, who became Fed chairman in February, has more regularly noted that the past few expansions ended with bursting financial bubbles rather than surging inflation. Hence, the Fed meet on December 18-19 would be crucial in understanding further if there is a course correction.

"It's important to distinguish between financial market volatility and events that threaten financial stability", he said.

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

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Paul Ashworth, chief US economist at Capital Economics, said he expects two rate hikes in 2019, not the three the Fed has been projecting for next year.

Higher interest rates tend to slow economic growth over time as well as pressure stock prices.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump was cited as saying in a Washington Post report based on the interview.

Currently, the Federal Open Market Committee forecasts three quarter-point hikes for next year after a December increase, which is virtually guaranteed.

The fed fund futures contract expiring in January 2020, a heavily traded contract that reflects market expectations for where rates will be at the end of 2019, rallied sharply on record volume and pointed to an implied yield of 2.70 percent. 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.

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