The Fed’s No. 2 on Rate Hikes and Inflation

Bloomberg

Bloomberg

Wall Street closed slightly lower on Thursday as tech and financial shares slumped, erasing earlier gains stemming from Federal Reserve minutes showing the central bank opened the debate on when to pause further interest rate hikes. He subsequently put pressure on Burns to keep interest rates down in the hope that unemployment would remain low in the run-up to the 1972 presidential election.

However, a few officials expressed uncertainty regarding the timing of such rate increases over the next year.

Volume on USA exchanges was 6.85 billion shares, compared to the 7.67 billion average over the last 20 trading days.

"I am pleased to say", Powell said Wednesday, "that our economy is now close to both of those objectives". With the minutes also confirming the Fed adopting a more data-dependent approach to rate hikes, the Dollar will most likely display high levels of sensitivity to economic data moving forward. Some listeners thought his tone conveyed greater conviction about continuing rate increases.

His clarification Wednesday didn't otherwise indicate any substantive change in the Fed's policy plans. He will have an opportunity to do that next week in testimony on Capitol Hill. But that doesn't mean rates won't rise further, as most officials said another rate increase was likely, perhaps as soon as next month. It promises to confirm investor expectations that the Fed will raise its interest rate when it meets later this month. "But I think they are overpriced", he said.

Still, Mr. Powell's observation appeared to soothe anxious investors.

The Fed’s No. 2 on Rate Hikes and Inflation

"Business sector debt relative to (gross domestic product) is historically high and there are signs of deteriorating credit standards", the Fed report stated.

In a speech Wednesday, Fed Chairman Jerome Powell raised similar points, which sent stock markets surging. But signs of a slowdown overseas and almost two months of market volatility - including another sharp selloff last week - have clouded an otherwise mostly rosy US picture in which the economy is growing well above potential and unemployment is the lowest since the 1960s.

The president previous year selected Powell, at the time a Fed board member, to lead the central bank after a highly public selection process in which he chose not to offer a second term to Chair Janet Yellen. But turning to financial stability, the main topic of his speech, he added, "We know that things often turn out to be quite different from even the most careful forecasts". "Our gradual pace of raising interest rates has been an exercise in balancing risks".

But keeping rates "too low for too long" could create other risks, including accelerating inflation, he said. It also expects inflation to be steady.

Mr. Powell flagged rising indebtedness and deteriorating loan quality among some US businesses as top vulnerabilities within the USA financial system, but otherwise described such risks as moderate. What he actually said was that rates are "just below the broad range of estimates of the level that would be neutral".

Powell in a recent public appearance said policymakers had suffered "a failure of imagination" back then regarding how central financial stability was to the economy overall.

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