Fed Chief's Remarks On Economy And Interest Rates Cheer Investors

Jeannie Matthews
December 1, 2018

With the broad range of 2.5% to 3.5% and a current Fed Funds rate of 2% to 2.25%, this gives a median of 3 to 4 rate hikes of 0.25% before we hit Powell's target.

"Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon, " assuming the economy performs in line or stronger than their expectations, the central bank said in the minutes of its November 7-8 session released in Washington Thursday.

"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. Stocks swooned on those remarks as investors bet the USA central bank would need more rate hikes to prevent the economy from overheating. In his latest comments Tuesday, Trump blamed the Fed not only for the stock market's declines but also for General Motors' announcement this week of jobs cuts and plant closings.

In a speech Wednesday, Fed Chairman Jerome Powell raised similar points, which sent stock markets surging.

The rate hike likely coming on December 19 would raise the benchmark lending rate, which influences borrowing costs throughout the wider economy, to 2.5 per cent.

Jerome Powell, the man President Donald Trump chose a year ago to lead the Federal Reserve, may at times think he's living through a prolonged episode of the "The Apprentice", the reality TV show in which Trump was famous for declaring, "You're fired!"

In the week ahead, the Fed will see one of the last big economic statistics before its next interest rate decision.

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Feldstein says the Fed should keep raising rates to protect the USA economy from a potential downfall. Most recently, I suggested that judging the stance of monetary policy on the basis of the still historically low level of interest rates failed to take into account the impact of the Fed's dramatic contraction of liquidity via its balance-sheet reduction. Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.

The Fed chairman said the central bank is monitoring potential vulnerabilities in the banking system to ensure its continued stability.

Mr Trump has criticised Mr Powell repeatedly this year, saying that the base rate is unnecessarily high and risks curtailing an economic boom in the US.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump said in the interview. And Narendra Modi, the Indian prime minister, has recently launched a series of attacks on the Reserve Bank of India for raising interest rates too quickly.

Essentially, it means rates are close to where he wants them to be, and investors are expecting fewer rate hikes to derail the bull market.

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

While the speech had "cleaned up after Powell's sloppy language last month", markets may have reacted too strongly to the comments, said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

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