Published: Sat, December 01, 2018
Money | By Ralph Mccoy

Fed likely to raise rates in December but concerns mounting: minutes

Fed likely to raise rates in December but concerns mounting: minutes

Well, yes. However, in the same speech, Fed Chairman Jerome Powell reminded investors "there is no preset policy path" for the Fed.

With the Federal Reserve expected next month to raise rates to what some US central bankers believe is at or near a neutral level, Chairman Jerome Powell is retuning his message to signal a more cautious approach on further rate hikes next year.

Powell in his remarks Wednesday also raised the importance of policymakers staying flexible in charting a path of policy given that the effects of rate hikes show up with a lag - a point that was reinforced in the Fed's November minutes.

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes.

While Fed officials expected solid growth to continue before slowing to a pace closer to its trend over the medium term, they still saw some risks.

The minutes of the Fed's November 7-8 meeting showed 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.

"The markets really got a head fake in October, (but on Wednesday) he strongly walked back those expectations", said Scott Anderson, chief economist at Bank of the West. "This sounds like a more flexible approach to policy for 2019 than the impression created by the notion that the Fed has chose to lift the federal funds rate to neutral and that neutral was 3% or higher".

"We also know that the economic effect of our gradual rate increases are uncertain, and may take a year or more to be fully realized", Powell said in NY.

Policymakers had provisionally pencilled in three quarter-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

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One irony of the market reaction to Mr. Powell's word choices is that he has spent considerable energy during his tenure as Fed chairman trying to emphasize the uncertainty of these estimates and to fashion a more plain-spoken approach to central-bank communications.

By saying rates were slightly lower than the level he perceives as "neutral", the Fed chief's statement appears to be suggesting at least one more interest rate increase is coming in the near future.

While numerous Fed watchers saw the remarks as nothing new, many investors heard it as a signal that the central bank was far from finished raising interest rates.

"Powell took pains to state that the FOMC's rate projections are based on their best assessments of the economic outlook", Kevin Logan, chief U.S. economist for HSBC wrote in a Wednesday note to clients, referring to the policy-setting Federal Open Market Committee. He also noted that the economy is close to both maximum employment and price stability, assuaging some lingering concerns from October's volatility.

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.

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.

"There is a great deal to like about this outlook", Mr. Powell said. Last month, Mr Powell said the Fed still had a "long way" to go before it reached that equilibrium. Not even a little bit. Bloomberg Economics anticipates three increases.

The continued strength of the American economy has made it more likely that the Fed will stick to its plans to raise rates in December, as part of its strategy to keep growth on an even keel into 2019.

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