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

Jerome Powell gives testimony

Federal Reserve chair Jerome Powell Federal Reserve

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY.

The minutes also revealed that Fed officials talked about modifying language in their policy statement, which now states that it expects "further gradual increases" in interest rates.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth", Powell said in a speech at the Economic Club of NY on Wednesday. From the Fed's perspective, the interest rate hike in December will probably lead to an interest rate level that will no longer justify the automatism of a quarterly interest rate hike.

Other external risks flagged by the central bank include the British government's plan to leave the European Union, China's slowdown and a significant increase in either corporate or sovereign debt by emerging market economies in Turkey and Argentina.

Rising wages and robust consumer confidence mean there is a good chance that GDP growth will remain strong before slowing in line with more recent trends, some participants said.

The value of stocks jumped for US and Asia markets after the Federal Reserve chairman indicated interest rates would remain unchanged for the New Year.

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly.

The possible policy shift occurred at a meeting at which the Fed also resumed debate on how best to manage short-term interest rates in the future, a decision that could influence the final target size of the Fed's still-massive balance sheet.

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"Powell is not suggesting that since they are just below the range they may stop soon".

The last two recessions were triggered when asset bubbles burst, and critics said the Fed should have done more to control the financial system.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes. The US federal funds rate range is now 2.0-2.5 per cent. Any such slowdown - or pause - in its rate hikes would be welcome news for a stock market that has been battered by fears that the Fed's continued credit tightening could end the long bull market. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.

In November, Fed policymakers agreed to hold rates steady, leaving the benchmark rate unchanged in a range of 2% and 2.5%. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation.

"It removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", said Roberto Perli, an analyst at Cornerstone Macro, in a report Wednesday.

"There is a great deal to like about this outlook", said Powell on Wednesday.

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