Federal Reserve appears more cautious on interest rate hikes next year

03 December, 2018, 04:34 | Author: Sally Reid
  • Alex Brandon  AP

Powell said that "there is no preset policy path" for future rate hikes and the current level for the Fed's benchmark rate was very close to "neutral", the point where the Fed is neither stimulating economic growth or slowing growth.

The rate increases have gradually raised borrowing costs for consumers and businesses. Critics have expressed worry that the president's attacks threaten the Fed's ability to operate free of political pressure.

The Fed chair's latest statements come after a barrage of criticism from Trump. Its removal would flag a possible pause in roughly quarterly hikes that had been expected to continue through 2019, without committing the central bank to moving or not moving at any particular meeting. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation.

Bond issuance has risen steadily this year to pay for President Donald Trump's tax cuts and spending increases. The courts ruled decades ago that "for cause" meant more than a policy disagreement with the president. The reality is that Trump, a product of United States finance capital, simply puts in crude and abrasive terms the demands emanating from Wall Street.

While noting that some forms of corporate debt levels have become concerning, Powell the financial system and markets appear far sturdier than they did before the 2008 crisis.

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.

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Nor did the Fed and other major economic bodies see the "excesses" that led to the financial meltdown of 2008, instead claiming that the USA and world economy had entered a period of "great moderation". Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

Mr Trump blames Mr Powell for the rate hikes that he claims are undermining his economic and trade policies.

"The risks of destabilizing runs are far lower than the past", Fed Chairman Jerome Powell said in a speech Wednesday.

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". "Bloomberg Economics does not take it as a signal of the Fed dialing back on the number of expected rate hikes, but rather as an intent to be more flexible in setting policy as they approach the neutral rate".

But whether the markets are correctly assigning a new future policy path to the Fed given Powell's comments on Wednesday or not, there are two certainties when it comes to the next few years of Fed communications. Bloomberg Economics anticipates three increases.

"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.

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