Markets

Fed: Rate hike 'warranted soon'

Fed: Rate hike 'warranted soon'

Yields on shorter-dated US government bonds fell on Wednesday afternoon, steepening the yield curve, after Federal Reserve Chair Jerome Powell delivered a speech in which he signaled that an end to the bank's interest-rate hike cycle may be closer than previously suggested.

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. This is probably because Fed Chair Jerome Powell stole most of the thunder the day before with his dovish remarks about the fate of future rate hikes.

Economists and investors have been scratching their heads this week over signals from the Federal Reserve, which left the future of USA monetary policy open to broadly divergent interpretations. But 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. The minutes and Powell's comments did have one thing in common, they both signaled a December interest rate hike.

The Fed has raised rates three times this year and says the current economy is in strong shape.

"His description highlights the significant uncertainty around estimates of neutral, a theme he mentioned at his speech at Jackson Hole in August", Jan Hatzius, chief United States economist for Goldman Sachs, wrote in a note to clients Wednesday.

"Powell is not suggesting that since they are just below the range they may stop soon".

"There is a great deal to like about this outlook", Mr. Powell said. "All he is doing is pointing out an obvious idea", Porcelli wrote in a client note. The first is that we will hear from Powell more often.

On Wednesday, Powell also emphasised these uncertainties.




America's economy is still growing robustly, but a string of possible outside shocks including President Donald Trump's protracted trade rift with China could trigger a downturn, according to a report released by the Federal Reserve on Wednesday. "We will be paying very close attention to what incoming economic and financial data are telling us".

Referring to the Fed's gradual increases in its benchmark rate, Powell said, "there is no preset policy path".

"The neutral rate is an absurd concept". His remark then had unsettled investors who feared it signaled that the Fed would continue raising rates well into the coming months.

The minutes of a meeting of the US Federal Reserve earlier this month show that nearly all officials expect an additional interest rate hike next month.

October inflation figures published yesterday showed upward price pressures right at the Fed's two per cent target while consumers continued to spend at a brisk pace.

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed. Oxford Economics now predicts a single increase in 2019 while JP Morgan and Goldman Sachs see four.

Trump's blunt public criticism of the Fed is without precedent.


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