Monday, 18 March, 2019


Federal Reserve hints at fewer interest rate rises

Federal Reserve hints at fewer interest rate rises Federal Reserve hints at fewer interest rate rises
Conrad Doyle | 29 November, 2018, 15:56

Dollar weakness in the wake of Powell's comments was expected to be limited, given a note of caution ahead of the G20 summit on Friday and Saturday where U.S. President Donald Trump and China's President Xi Jinping are scheduled to discuss contentious trade matters. He told the Washington Post on Tuesday that he is "not even a little bit happy" with the Fed chief. "Not even a little bit", Trump told the Washington Post.

But higher interest rates tend to slow economic growth, and since growth in the USA and other regions is already likely to slow down next year, investors are concerned the increases will hinder the economy.

But the odds of a 0.25-point rise in March have fallen to 34% from 50% according to FactSet.

Powell's speech was focused largely on a new Fed report on stability of the United States financial system, but contained an unusual comment: "By clearly and transparently explaining our policies, we aim to strengthen the foundation of democratic legitimacy that enables the Fed to serve the needs of the American public".

Powell said his Fed colleagues and many other economists "are forecasting continued solid growth, low unemployment, and inflation near 2 percent". The increases have infuriated Trump who has consistently criticized Powell and this week blamed recent stock market sell-offs and General Motors' decision to lay off 14,700 people in part on Powell.

He said: "We will be paying very close attention to what incoming economic and financial data are telling us".

In his speech, Mr Powell said he viewed gradual increases as the best way to balance the risks of causing problems by raising rates too fast or too slowly.

The president a year ago selected Powell, at the time a Fed board member, to lead the central bank after a highly public selection process in which he chose not to offer a second term to Chair Janet Yellen.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump said.

Equity investors reacted favourably to Powell's comments, which indicated there may not be as many rate hikes from the Fed in the future as initially anticipated. I'm not going to say it's so much Trump ー that Trump has been sending mean tweets about Chairman Powell.

The prospect of slower interest rate increases was well received on Wall Street. Trump has complained that the Fed is threatening to undo the economic stimulus being provided by the tax cuts and that its rate hikes are unnecessary because inflation has remained relatively low.

Translation: If growth does slip in 2019, as many expect, the Fed could well take a chill pill and hold off on further rate hikes.

The pound sterling yesterday leapt higher as markets brushed off building pessimism over Brexit uncertainty following the release of the UK's financial stability report and remarks from Bank of England Governor Mark Carney.

The reason: Some economic signals suggest rising rates really are crimping growth, such as the contraction in housing construction this year.

"I would not be surprised if they go with one more hike in December and then pause indefinitely to see what happens to the economy", Sohn said.

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