Powell Comments Suggest Fewer Rate Hikes Next Year

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Federal Reserve Chairman Jerome Powell speaks at the Economic Club of New York's luncheon in New York November 28, 2018.

Federal Reserve Board Chairman Jerome Powell speaks at the Economic Club of NY, on November 28, 2018, in NY.

In a speech that comes in the wake of another volatile market selloff, Powell offered few clues on how much longer the US central bank would continue tightening policy but he did say the policy rate, at 2-2.25 percent, is now "just below" the broad range of estimates of neutral, which in September was 2.5-3.5 percent.

The Fed has settled into a quarterly rate-hike cycle and is still expected to raise rates again next month, in what would be the fourth hike this year.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive", Oliver Pursche, chief market strategist at Bruderman Asset Management in NY, told Reuters.

His remarks on Wednesday were a distinct shift in tone from early October, when the Fed chairman suggested the central bank might go "past neutral, but we're a long way from neutral at this point, probably".

Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish". The minutes said that Fed contracts in agriculture said that conditions "remain depressed", reflecting in part the drop in exports due to the trade battle.

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"Participants also commented on how the Committee's communications in its post-meeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rates", the minutes said.

But Powell also noted a number of looming risks, including the slowdown in global growth and the fading economic benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed's own rate hikes. "This sounds like a more flexible approach to policy for 2019 than the impression created by the notion that the Fed has made a decision to lift the federal funds rate to neutral and that neutral was 3% or higher".

Economists and investors have been scratching their heads this week over signals from the Federal Reserve, which left the future of United States monetary policy open to broadly divergent interpretations. The first grade of Powell's tenure, in April, was 3.82. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said. "Certainly, all meetings are live now".

Powell's speech indicated that he is listening.

"What do you do?" said Powell in NY.

The central bank chief said his colleagues and many other economists "are forecasting continued solid growth, low unemployment and inflation near 2 per cent". That would bring it to about the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 per cent to 3.5 per cent. Three of those increases have been under Powell.

US President Donald Trump has openly criticised Mr Powell for his leadership of the Fed, despite selecting him for the job.

"There is a great deal to like about this outlook", Mr. Powell said.

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