Fed officials discussed hiking rates to 'restrictive' level

Lloyd Doyle
October 19, 2018

The rand retreated early on Thursday after minutes from the US Federal Reserve's September meeting struck a hawkish tone, draining some of the enthusiasm for emerging currencies that lifted the local unit to a two-week peak.

President Donald Trump is criticizing the Federal Reserve for raising interest rates too quickly.

As well as making life more hard for United States exporters, a stronger greenback also raises the borrowing costs of many heavily-indebted emerging market economies, such as those in Latin America which have high levels of dollar-denominated borrowing.

The Fed minutes showed some members were anxious by the instability in emerging markets, such as Venezuela and Argentina, warning it could "spread more broadly through the global economy and financial markets".

"This gradual approach would balance the risk of tightening monetary policy too quickly, which could lead to an abrupt slowing in the economy and inflation moving below the Committee's objective, against the risk of moving too slowly, which could engender inflation persistently above the objective and possibly contribute to a buildup of financial imbalances", the minutes said.

Treasury yields were little changed. Trump has accused the Fed of endangering the country's economic health, this week saying the central bank is his "biggest threat" and last week calling the central bank "crazy", "loco", "ridiculous", and "too cute". Following the rate increase in September, Trump said he was "not happy" with the decision.

FILE PHOTO: A jogger runs past the Federal Reserve building in Washington, DC, U.S., August 22, 2018.

However, other officials argued that they would not favor adopting a restrictive policy "in the absence of clear signs of an overheating economy and rising inflation". The next rate rise could come as soon as December. The Fed continues to debate the precise short-term neutral rate, while its median estimate for a long-run neutral rate is 3 percent.

Some investors say that, after years of easy money, pockets of risk have built up throughout the global economy - raising the chances that a bubble could burst or banks could see significant defaults on debt as borrowing costs begin to increase.

In minutes from last month's central bank rate-setting meeting, which unanimously agreed a third rise of the year, policymakers said further rate hikes "would most likely be consistent" with current economic indicators.

Other reports by Iphone Fresh

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