Fed Chairman Says Interest Rates Are Just Below Estimates of Neutral

Roman Schwartz
December 3, 2018

US FEDERAL Reserve chairman Jerome Powell gave investors a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy US economy.

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 remarks seemed more dovish than his comments in early October that the USA central bank had a long way to go before interest rates hit neutral, indicating that more hikes could be on the horizon.

Some members noted the further appreciation of the U.S. greenback could also pose as a downside risk to the economy.

In fact, Trump attacked Powell again in a Washington Post interview Tuesday, saying he was "not even a little bit happy" with Powell and that the Fed was making a mistake with so many rate hikes.

Trump has previously lamented interest rate hikes and expressed regret about nominating Powell. "Potential growth for supply is very limited and demand remains robust even though we've seen a decline in auto sales in China and a slowdown in vehicle sales in the United States", said Suki Cooper, precious metals analyst at Standard Chartered Bank.

For his part, Trump has sought repeatedly to shift blame for any economic troubles to the Fed and its rate increases.

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The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, Powell said.

"Powell said nothing to suggest that he or the majority of the FOMC think they'll be able to stop at the bottom of the range, after just one more hike", said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "This sounds like a more flexible approach to policy for 2019 than the impression created by the notion that the Fed has chose to lift the federal funds rate to neutral and that neutral was 3% or higher". "We have to be thinking about how much further to raise rates and the pace at which we will raise rates". Investors interpreted his remarks as evidence that the Fed might consider pulling back from quarterly rate hikes. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said. "The market is putting too much weigh on the dovish arguments here; I don't think that is what he meant to signal". "Certainly, all meetings are live now".

Powell and other Fed officials have since sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.

Powell noted the word "bubble" wasn't mentioned in the report, though he said some asset prices, such as corporate debt, were high relative to the past. You feel your way.

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy. Responding to the interviewer's comment that he had considered Powell would be a "low-rate person", Trump said: "Well, let's see what happens with Jay Powell".

His comments sparked a surge in a stock market that had struggled of late and came in the wake of criticism of the Fed's rate increases by President Donald Trump.

Factually, Powell's remarks on Wednesday and in October are both true.

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