Fed minutes: Further hike "warranted soon", debate opened on pause

Jeannie Matthews
December 1, 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.

U.S. central bankers believe another interest rate hike is due "fairly soon", boosting widespread expectations the Federal Reserve will raise lending costs next month, according to meeting minutes released Thursday.

Powell's comments briefly pushed the US 10-year bond yield below the psychologically key 3 percent level earlier on Thursday, its lowest level since mid-September.

Powell, in remarks just two weeks ago, had listed three possible challenges to growth in 2019: slowing demand overseas, fading fiscal stimulus at home and the lagged economic impact of the Fed's past rate increases.

Earlier in November, Powell was optimistic about the state of the economy, citing strong annual economic growth exceeding 3 percent and unemployment at a near five-decade low of 3.7 percent.

The Fed is poised to raise rates again at its next policy meeting in mid-December and to continue raising rates next year, according to the minutes of the Fed's most recent meeting released on Thursday.

Those remarks sparked a rally in stock and bond markets, while sending the dollar lower.

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With a December increase broadly expected, that meeting may stand out more for the fresh economic projections that policymakers will issue, providing a clearer view of how their perceptions of the economy and the proper path for rates may have changed in recent weeks. At best, the coming meeting could see a shift in the majority of Fed representatives surveyed from three to two rate hikes in 2019.

The US central bank chairman has repeatedly tried to advise investors not to read too deeply into the Fed's economic forecasts, saying policymakers often don't have the ability to see that far into the future and decisions are formed based on incoming data from markets, the economy and business contacts.

But minutes from the Fed's November 7-8 policy-setting meeting, released on Thursday, as well as remarks over the last two weeks, point to a reassessment of the Fed's longstanding promise of "further gradual rate increases" that would extend two years of almost uninterrupted quarterly tightening.

Tucked in his speech, Powell said that rates are "just below" the so-called neutral range, the level that central bankers believe will neither accelerate nor slow economic growth - a subtle two-word shift from comments he made in October suggesting that interest rates are still "a long way" from neutral.

"We keep thinking we're at maximum employment". "You slow down. You maybe go a little less quickly".

"I do think over time folks will have to get used to the idea that we can and will move at any meeting", said Powell in a question-and-answer session in Dallas. That would bring it about to the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 percent to 3.5 percent. The Fed's benchmark federal-funds rate since then has been between 2% and 2.25% - or just below the lowest estimate. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY. Bloomberg Economics anticipates three increases.

On Wednesday, Powell also emphasised these uncertainties.

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