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US Fed chairman hints at higher rates following Trump attack
WASHINGTON, Nov 29, 2018 (BSS/AFP) – A day after President Donald Trump’s
latest attack on the US central bank, Federal Reserve chief Jerome Powell
hinted Wednesday the key lending rate would move higher but said there was no
preset course.
Powell said in a speech in New York that interest rates remained “low by
historical standards” and still provided stimulus to the economy.
And he said economists estimated the Fed’s policy rate — at 2.25 percent
— was “just below” the estimate of neutral, a rate that neither stimulates
nor restrains the economy.
US stock markets jumped following the comments, as investors interpreted
them to mean the central bank was close to the end of its tightening cycle,
which has seen eight rate increases since December 2015 following the global
financial crisis.
The benchmark Dow Jones Industrial Average powered 2.5 percent higher,
turning positive for the year after steep recent losses.
“He said the magic words,” Gregori Volokhine of Meeschaert Financial
Services told AFP.
However, central bankers have never signaled they intend to stop raising
rates once they hit neutral — which is a moving target and subject to
debate. Instead they will watch economic data, especially inflation.
Ian Shepherdson of Pantheon Macroeconomics said markets were reading too
much into Powell’s statement and with historically low unemployment the Fed
may have no choice but to keep raising.
With estimates of a “neutral” rate in the range of 2.5-3.5 percent, the
Fed is “only one hike away from the bottom end of the range but it remains
three hikes from the middle of the range,” Shepherdson said in a research
note.
– ‘Democratic legitimacy’ –
Trump on Tuesday again blasted his hand-picked chief of the US central
bank, saying the Fed was “way off base” and the rate hikes undermined the
work he was doing to juice the US economy.
The Federal Reserve chairman has presided over three interest rate
increases this year and is widely expected to hike again in December.
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“They’re making a mistake because I have a gut and my gut tells me more
sometimes than anybody else’s brain can ever tell me,” Trump said in an
interview with The Washington Post.
In his speech to the New York Economic Club, Powell again stressed there
was “no preset policy path” for interest rates and said the central bank had
moved gradually, since “moving too fast would risk shortening the expansion.”
But keeping rates “too low for too long” could create other risks,
including accelerating inflation, he said.
“As always, our decisions on monetary policy will be designed to keep the
economy on track,” he said.
But in response to questions he likened the policy process to walking
through a dark room, forcing officials to slow down. “You feel your way more
under uncertainty of this kind.”
Powell has dismissed the unprecedented political attacks from Trump,
saying they have no influence on deliberations of the independent central
bank.
But many economists warn that the attacks actually could pressure the
central bank to raise rates to demonstrate its independence from political
influence.
Powell’s speech was focused largely on a new Fed report on stability of
the US 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.”
– No dangerous excesses –
He also explained the Fed’s inaugural report on the stability of the US
financial system, released earlier Wednesday, noting that the central bank
did not see “dangerous excesses” in stock markets. And he said the financial
system was now “substantially more resilient” than it was before the 2008
financial crisis.
“My own assessment is that, while risks are above normal in some areas and
below normal in others, overall financial stability vulnerabilities are at a
moderate level,” Powell said.
While he acknowledged the growing concern over increased borrowing by
businesses that already carried a high debt load, he said for now they were
“unlikely to pose a threat to the safety and soundness” of the system in the
event of a downturn.
Meanwhile “the unsettled state of trade negotiations, Brexit negotiations,
budget discussions between Italy and the European Union, and cyber-related
disruptions” all remain risks to the global economy, he said.
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