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Economists, Wall Street split on Fed signals

03 December, 2018, 00:39 | Author: Sara Gill
  • Jerome Powell gives testimony

But the likely pace of rate increases next year remains a subject of speculation.

US President Donald Trump has openly criticised Mr Powell for his leadership of the Fed, despite selecting him for the job. Any slowdown or pause in the Fed's rate hikes would be welcome news for a stock market that's been battered by fears that the Fed's continued credit tightening could end the long bull market.

"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", Mr Powell told the Economic Club of NY.

"It removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", said Roberto Perli, an analyst at Cornerstone Macro, in a report Wednesday.

"Powell's comments suggest that 2019 may be more of a wait-and-see approach and the assumption of any hikes may be premature", said Tai Wong, head of metals trading at BMO.

Those comments followed a series of public attacks on the chairman of the Fed, a position that, while appointed by the president, is supposed to enjoy political independence. Responding to the interviewer's comment that he had considered Powell would be a "low-rate person", Trump said: "Well, let's see what happens with Jay Powell".

"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and global financial markets and strains in institutions", according to the Fed report.

"We also know that the economic effects of our gradual rate increases are uncertain and may take a year or more to be fully realised", he said, adding that there was "no preset policy path".

In his speech Wednesday, Powell made no mention of Trump's criticism, and he wasn't asked about it during a question period with economists afterward. Current financial system vulnerabilities are at a "moderate level", the Fed has said.

In an appearance earlier this month, Powell cited strong annual economic growth above 3 per cent and unemployment at a near five-decade low of 3.7 per cent.

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.

In his speech Wednesday, Powell spoke directly to the stock market volatility and somewhat downplayed the recent action.

But Powell said: "my view is that such losses are unlikely to pose a threat to the safety and soundness of the institutions at the core of the system and, instead, are likely to fall on investors in vehicles like collateralized loan obligations with stable funding that present little threat of damaging fire sales".

It isn't clear that these conditions could trigger a recession on their own, he said, noting that the ratio of corporate debt to economic output didn't seem unusual. Earlier this month that contract's implied yield was a full quarter point higher at 2.95 percent, indicating that investors have now cut a full Fed rate hike from their expectations for the central bank's policy trajectory. But some economists say three rate increases for next year are beginning to look less certain.

The Fed is still likely to raise rates in December.


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