Fed: Rate hike 'warranted soon'

Fed Chairman Powell “Rate Hikes Are Not Automatic in Healthy Economy”

Fed Chairman Powell “Rate Hikes Are Not Automatic in Healthy Economy”

The possibly dovish shift in language on Wednesday came as President Donald Trump stepped up attacks on Powell, criticizing the Fed's rate hikes as undercutting his economic and trade policies.

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.

And Powell's words stood in stark contrast to his remarks of a month earlier, when he said rates were still "a long way" from neutral, perhaps suggesting the Fed actually had a lot more tightening to do.

Daco said Powell's comments - coupled with comments from Fed vice chair Richard Clarida on Tuesday - show a "growing desire by the Fed to move the landing zone for the federal funds rate, and signal less cumulative tightening ahead". "From the financial stability perspective, however, today we do not see risky excesses in the stock market".

Next month's expected quarter-point increase would lift the central bank's target for the federal funds rate to a range of 2.25 per cent to 2.5 per cent. The Fed has raised rates three times this year.

The minutes said that such a change would help to convey "the Committee's flexible approach in responding to changing economic circumstances", while market supposed that this could indicate possible changes for the Fed's rate hike decisions in 2019. It followed several weeks of market volatility that some investors had blamed on uncertainty over the Fed's intentions, among other things.

After keeping rates at a record low near zero for seven years, the Fed three years ago began gradually raising rates, including three hikes this year.

Compared with his recent predecessors, Mr. Powell, who became Fed chairman in February, has more regularly noted that the past few expansions ended with bursting financial bubbles rather than surging inflation.

Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates.

These more measured reads on Powell's comments, however, are not what Wall Street says it heard on Wednesday.

The chairman added that the Fed regards no major asset class as significantly inflated, "as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom".

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", he said.

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. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

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

Whether or not investors were using their guts or brains when deciding to jump back into stocks Wednesday remains to be seen.

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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