Economists, Wall Street split on rate hike signals
01 December, 2018, 12:56 | Author: Sara Gill
According Reuters, 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.
"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.
The central bank expects the unemployment rate to remain historically low next year. This should be clarified at the next meeting on December 18-19.
He also noted that the economy is close to both maximum employment and price stability, assuaging some lingering concerns from October's volatility.
In remarks delivered two weeks ago on a late evening in Dallas, Powell refined his summertime message, explaining that just as someone in a room where the lights suddenly go out must "slow down" to avoid running into furniture, the Fed must do the same when nearing neutral to avoid missing signals from economic data.
Stock markets turned higher after release of the Fed minutes, continuing a rally begun on Wednesday when Fed chair Jerome Powell seemed to signal a possible shift in tone. And neither should investor expectations about the Fed's future work.
His renewed focus on the "neutral" level of interest rates as a potential turning point for policy that until now has been on a steady tightening path is echoed by the minutes.
It was a "rookie mistake, " Omair Sharif, senior USA economist at Societe Generale, said Wednesday in a note to clients. The fear of higher United States interest rates - fuelled by a surging economy - has been a key driver of a global equity sell-off over the past few months, while the dollar has soared as traders put cash into the U.S. looking for better, safer returns. And then wage growth is tepid. On October 3, he said rates were "a long way" from neutral levels. His emphasis on Wednesday suggested greater flexibility to stop sooner or move more slowly.
"Powell's comment that the benchmark funds rate is "just below the broad range of estimates of the level that would be neutral for the economy" was enough to spark a strong bounce in USA equities, while the 10 year yield briefly dipped below 3% for the first time since mid-September". "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing", he was quoted as saying in the report. "It's ironic that a concept, the neutral rate, in which the Fed has such little confidence, has swung markets so dramatically in the past two months", Basta said.
The dollar, which has outperformed bonds and the benchmark S&P 500 stock index this year amid rising interest rates and safe-haven flows triggered by global trade tensions, was modestly higher. Three of those increases have been under Powell.
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. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.
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