Fed emphasises flexible policy path after likely December hike

Was Post Fed Chair Speech Rally a Market Overreaction

"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".

The change comes months after Powell indicated plans to raise interest rates and cool down the United States economy, moves that run counter to President Donald Trump's expansionary moves, including last year's tax cuts.

President Trump has been a vocal and outspoken critic of Powell - whom he selected to replace Janet Yellen as Fed chair - saying he was "not thrilled" with him. And the headline unemployment rate drops further.

The benchmark rate, now at 2 to 2.25 per cent, 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 per cent.

His comments were interpreted by many investors as a signal that the Fed's three-year tightening cycle is drawing to a close.

US Federal Reserve chairman Jerome Powell.

The rate hike likely coming on December 19 would raise the benchmark lending rate, which influences borrowing costs throughout the wider economy, to 2.5 per cent.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected a year ago to oversee the world's most powerful central bank a "threat".

Ironically, it was a reference to that guidepost that led to what in retrospect looks like a communication stumble, when stocks tumbled in early October after Powell's remark that interest rates were a "long way" from neutral and might even need to rise above that level.

"Powell is not suggesting that since they are just below the range they may stop soon".

Powell also underscored the importance he places on communicating the Fed's thinking in a way that people will understand.

"What do you do?" said Powell in NY.

That "just below" phrasing seemed to indicate that the Fed is almost done raising rates for the time being. "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing".

But policymakers may be divided over what to do after that, with some anxious raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed. Speaking on Wednesday, Powell said the effects of Fed policy decisions "may take a year or more to be fully realized".

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.

With a December increase broadly expected, that meeting may stand out more for the fresh economic projections that policymakers will issue, providing a clearer view of how their perceptions of the economy and the proper path for rates may have changed in recent weeks.

"We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilizing financial imbalances".

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.

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