Fed officials express caution about pace of future hikes

Jerome Powell gives testimony

Federal Reserve chair Jerome Powell Federal Reserve

Federal Reserve chairman Jerome Powell said on Wednesday that the central bank's key benchmark interest rate is near the neutral rate, which is an important distinction from his message in October about the neutral rate being far away. "However, several dealers noted that they perceived recent communication regarding the neutral policy rate and its role in informing monetary policy as being unclear or at times inconsistent with prior Fed communication", the survey said in the comments section.

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

Powell stressed that future interest rate hikes aren't on a "preset policy path", which may suggest that the Fed would consider a pause in its rate hikes next year to assess the impact of its credit tightening.

The speech was focused on stability in the financial system, and Powell cited four potential vulnerabilities for the economy, including excessive leverage and debt loads in some sectors.

On Wednesday Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment and inflation near its 2 percent target.

Speaking to the Economic Club of New York Powell said interest rates were now "just below" the range Fed officials consider neutral, a setting created to neither speed nor slow growth.

The Fed's current pattern of raising rates gradually - roughly once a quarter over the past two years - is an effort to balance two risks. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.

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.

But Powell's most recent words should be taken along with other recent remarks in which he showed concern for the global economic outlook.

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. 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.

The minutes of the Fed's November 7-8 meeting showed that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.

"Many baby boomers like me are, however, reaching an age where a good report is, 'Well, there are a number of things we should keep an eye on, but all things considered you are in good health, '" said Powell.

"We know that moving too fast would risk shortening the expansion", Mr. Powell said. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 percent annual price increases.

In a continuing series of comments, US President Donald Trump has criticised the Fed's interest rate rises.

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".

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