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

Posted December 01, 2018

In remarks this week Fed chair Jerome Powell seemed to point to a possible pause in rate hikes as early as next year when he said rates were "just below" some estimates of the neutral rate that could serve as a temporary stopping point as the central bank assesses the impact of its policy changes so far.

In what was seen as a shift in tone from remarks last month, Powell said Wednesday that the Fed's series of rate increases had brought policy to "just below" the range of estimates of neutral, where it neither spurs nor restricts the economy.

That stood in contrast with comments Powell had made in October when he said that the Fed's policy rate was still a "long way from neutral".

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. The current system relies on the Fed paying interest on some reserves to set the federal funds rate.

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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. Why should he? The data for the United States economy remains strong. That comment had unsettled investors who feared that it meant the Fed would need a number of further hikes to get to neutral.

There wasn't much of a reaction in the financial markets on Thursday to the minutes from the Fed's early November meeting.

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

He did not specifically cite the criticism he has faced from the White House, but he defended the Fed's recent moves and said "there is no preset policy path". "We now run a larger risk" that communications at the Fed's December meeting will be more hawkish than markets expect, he said. 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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Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral. "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.

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. Three of those increases have been under Powell.

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, " he said in a speech to the Economic Club of NY.

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