Why Did Fed Chairman Jerome Powell Back Off on Rate Hikes?

Bloomberg

The Fed has already raised U.S. interest rates three times this year, and the next rate hike is expected at its next policy meeting in mid-December.

Moving forward, investors will now turn their attention to the release of minutes from the U.S. central bank's November meeting in order to obtain further clues on the Fed's monetary tightening path.

In its most recent projections, the Fed forecast that it would raise rates in December for the fourth time this year, followed by three more hikes in 2019. 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 also said Wednesday that while some corporate debt loads have reached riskier levels, "we do not see unsafe excesses in the stock market".

Powell noted that rates are "just below neutral" and that "interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth".

His comments contrast with views he expressed in October when Powell said the Fed was "a long way off" neutral. He tried to dismiss as premature questions over whether the Fed would need to raise rates above neutral to a level aimed at slowing growth. 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.

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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.

Rather, he said, the Fed will assess the most recent economic and financial data in deciding whether or how fast to keep raising rates.

In an appearance earlier this month, Powell cited strong annual economic growth above 3 percent and unemployment at a near five-decade low of 3.7 percent. Trump tapped Powell past year to be Fed chairman after he decided against giving Janet Yellen a second term.

"I'm doing deals, and I'm not being accommodated by the Fed", he said in an interview with the Washington Post. The mere hint of fewer rate hikes in 2019 was enough to ebb the stock sell-off for at least one day last week.

"What a difference having a written and carefully vetted speech makes with respect to speaking freely and without a script, " Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington, told clients on Wednesday.

The minutes did raise a number of worries about Trump's get-tough trade policies, which have levied tariffs on billions of dollars worth of imports from China and other countries and prompted retaliation against US products. Prico Risk Management and Investments CEO Yossi Fraiman said, "We believe that the Bank of Israel's raising of interest will be very cautious due to the sharp fall in energy prices, which will moderate the rate of inflation".

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