Fed minutes: Further hike "warranted soon", debate opened on pause

Fed minutes: Further hike

Federal Reserve Chairman Jerome Powell struck a generally optimistic note on Wednesday about the state of the US financial system and indicated that interest rates, while still low by historical standards, are near neutral, sending stocks higher. The reason for this was a formulation that the current key interest rate was just below the broad range of estimates for the neutral interest rate.

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes.

A few participants who agreed further rate increases were likely to be warranted also "expressed uncertainty about the timing" as Fed officials discussed how to communicate a possible change in their approach to any further hikes.

The Fed held rates steady at its November meeting, and made no mention in its statement after that session about the sharp sell-off in equity markets in the weeks before it.

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Karim Basta, chief economist at III Capital Management, said recent market volatility showed toning down the neutral rate debate was the way forward.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral. Why should he? The data for the United States economy remains strong.

Markets are now trying to divine Powell's plans from data pulling in two directions - rising wages that could be a precursor to inflation, for example, compared to slowing growth and falling oil prices that may keep inflation down, or other indicators clouding the picture. The FOMC is likely to link future interest rate decisions more closely to incoming data and then decide on a case-by-case basis.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy. With previous hikes in March, June, and September, one more rate hike this year would put 2018's rate of increases on par with 2006, the last year the Fed increased rates prior to the crash.

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"Westpac is forecasting rates will rise in December, and this will be followed by 3 further rate hikes in 2019". "Certainly, all meetings are live now". But that approach is no longer appropriate, Powell said. You feel your way. "I think that's what we've been doing".

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. It slowly began to raise them again in 2015 as the economy regained strength under Obama, and it has raised rates six times since Trump took office.

"The neutral rate is an absurd concept". Bloomberg Economics anticipates three increases.

Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year.

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"There is a great deal to like about this outlook", he added.

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