Fed Holds Rates Steady And Signals More Rate Increases Ahead

Lloyd Doyle
November 12, 2018

Some economists foresee only two Fed rate hikes next year. The market pullback received no mention in the Fed's statement, unlike earlier downdrafts in 2015 and 2016.

Some Fed officials also believed that US interest rates might have to rise high enough to prevent economic overheating, according to the minutes of the Fed's September policy meeting released last month.

The quickened pace of economic growth - a 3.5 percent annual rate in the July-September quarter, after a 4.2 percent rate the previous quarter - has raised the risk that inflation could begin accelerating.

"By the middle of next year, however, we expect economic growth to slow below its potential pace, which would force the Fed to the sidelines", he said in a note.

In September, Fed officials penciled in plans to raise their benchmark short-term rate once more this year.

USA policy makers are also contending with a strengthening dollar as interest rates rise and more recent market volatility just as other central banks take steps to end crisis-era stimulus programs.

Fed policymakers agreed to hold rates steady this month, according to a statement released Thursday at the conclusion of a two-day policy-setting meeting in Washington.

The Fed is edging closer to what it sees as the "neutral" level.

Financial markets have also experienced more volatility.

Analysts saw the central bank's decision to highlight the economy's strength and to make few changes in its policy statement as a sign that it remains on track to raise rates next month.

"Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral", Powell said during an interview with PBS.

Investors anticipate policymakers will push rates higher at least three more times in 2019, a standard policy response to a booming economy that also buys central bankers wiggle room in the event of a downturn.

But President Donald Trump has sharply disagreed, and since the stock market started tumbling last month, he has attacked the Fed's rate hikes as well as Powell's leadership. The Fed's preferred measure of annual consumer inflation last stood at 2 per cent, in line with its target.

As the economy powers ahead and wages are now rising at their fastest pace in nearly a decade, concerns are rising that inflation could pick up and the Fed might need to hike rates even faster. I see the market today walking back a little from the strong gains yesterday.

The FOMC at its September meeting actually voted to remove the word "accommodative" from its description of the current policy path. Powell and others have said the word is no longer useful in describing how the Fed is proceeding.

One key question is the degree to which higher wages could lead businesses to raise prices.

The Fed did not specify any risks to the economy it perceives.

"We've stayed pretty focused on the facts about the economy", said Randal Quarles, the central bank's vice chairman for bank supervision, in response to a question about Mr. Trump's criticism last month.

Other reports by Iphone Fresh

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