Powell Comments Suggest Fewer Rate Hikes Next Year

Was Post Fed Chair Speech Rally a Market Overreaction

Federal Reserve Chairman Jerome Powell opened the door for a potential pullback in projected interest-rate hikes for 2019 following a widely expected increase in December.

Traditionally, stock markets love lower interest rates.

Some policymakers agreed with the idea of further rate increases, but also "expressed uncertainty about the timing".

He also noted that the economy is close to both maximum employment and price stability, assuaging some lingering concerns from October's volatility.

Speaking at the Economic Club of NY on November 28, Jerome Powell outlined the Fed's decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation's financial stability.

But minutes from the Fed's November 7-8 policy-setting meeting, released on Thursday, as well as remarks over the last two weeks, point to a reassessment of the Fed's longstanding promise of "further gradual rate increases" that would extend two years of almost uninterrupted quarterly tightening.

The Fed members' comments initially appeared to comfort investors.

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Kashkari said he was "more worried" about that the Fed raises rates "prematurely" when the job market "has slack" and the wage growth hasn't picked up yet.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients.

"Powell's comment that the benchmark funds rate is "just below the broad range of estimates of the level that would be neutral for the economy" was enough to spark a strong bounce in U.S. equities, while the 10 year yield briefly dipped below 3% for the first time since mid-September". That suggested to many investors that fewer rate increases might be on the way. At some point rates will cross into a neutral zone for the economy and then, if the Fed keeps pushing them up, they will become restrictive, slowing growth.

"Participants also commented on how the Committee's communications in its post-meeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rate", the minutes said.

"If you look down the road, you see challenges ahead, and they're challenges that are typical in a cycle", said Powell speaking earlier this month at the Federal Reserve Bank of Dallas.

"What do you do?" said Powell in NY. "I think that's what we've been doing". 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.

After the release of the Fed's meeting minutes, traders of interest-rate futures stuck to their bets that the Fed would slow rate hikes next year, to just one. Three of those increases have been under Powell. "However, market pricing implies that while the Fed is likely to hike in December (about 80% priced), it will move only once in 2019". "It's ironic that a concept, the neutral rate, in which the Fed has such little confidence, has swung markets so dramatically in the past two months", Basta said. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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