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Fed Chair’s comments on slower hikes to boost EMs

01 December, 2018, 13:00 | Author: Shawna Walton
  • Was Post Fed Chair Speech Rally a Market Overreaction

Well, yes. However, in the same speech, Fed Chairman Jerome Powell reminded investors "there is no preset policy path" for the Fed.

The upcoming interest rate decision-which will come December 19- will serve as a big signal for both the Fed's conviction for continued economic growth as well as the equity market's resilience to yet another hike.

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. The benchmark rate, now at 2.00-2.25 percent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 percent.

Back in August, Powell had rejected a too rigid reliance on an abstract guidepost like the neutral rate to shape policy, saying it could lead to costly mistakes.

With last year's deep tax cuts and fiscal stimulus from Congress, the world's largest economy continues to hum, producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed's two percent target.

Market participants interpreted that as a dovish signal for future rate hikes, compared with Powell's previous remarks in early October that rates were "a long way" from neutral, a level neither stimulative nor restrictive to the economy. But Powell's comments are prompting speculation among many investors that a looser policy may lie ahead.

There are many reasons why Powell would pick now to begin shifting his footing. "If US growth slows down next year, as expected, gold would benefit from higher demand", analysts including Jeffrey Currie said in a November 26 note that endorsed bullion as one of its top 10 trade ideas for commodities. But that approach is no longer appropriate, Powell said. Projections released in September showed most officials expected then they would raise rates once again this year. Now they foresee three quarter point hikes.

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. United States markets were sent soaring Wednesday after Fed chief Jerome Powell said borrowing costs were still historically low but only "just below" the neutral level, a rate that neither stimulates nor restrains the economy.

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

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. Home sales, vehicle sales, business investment and other parts of the economy that are sensitive to interest rates have begun to soften, evidence that the Fed's eight rate increases since 2015 are changing household and business behaviour. But that doesn't mean rates won't rise further, as most officials said another rate increase was likely, perhaps as soon as next month.

"To me, this implies a willingness to be more patient in the lower end of the range of neutral", he told Reuters.

"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, '" he said.

One challenge for the Fed is that officials aren't sure where a neutral rate actually lies.

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