Published: Sat, December 01, 2018
Markets | By Otis Pena

Powell Comments Suggest Fewer Rate Hikes Next Year

Powell Comments Suggest Fewer Rate Hikes Next Year

While the Fed is expected to raise rates by a quarter point at its meeting on Dec 19, it has forecast to have three more hikes next year.

Federal Reserve officials signalled they're adopting a more flexible approach in their gradual interest-rate increases after a likely December hike, as they try to sustain a United States expansion that may become the longest on record next year.

Minutes released yesterday from the Fed's November 7-8 policy meeting showed disagreements about the path of interest rates, with some policymakers worrying that tightening too fast could stem economic growth.

"The markets really got a head fake in October, (but on Wednesday) he strongly walked back those expectations", said Scott Anderson, chief economist at Bank of the West.

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.

Although a December rate hike has been widely expected, the Fed's path next year has been more uncertain, with investors last month expecting two or even three rate hikes in 2019.

Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish".

But minutes from the Fed's November 7-8 policy-setting meeting, released on Thursday, as well as remarks over the last two weeks, point to a reassessment of the Fed's longstanding promise of "further gradual rate increases" that would extend two years of almost uninterrupted quarterly tightening.

Easing off: New Westminster rental vacancy rate slackens to 1
According to Rouillard, some landlords across the city are seeing the high demand as a reason to not do as much upkeep on units. Across Canada, the overall vacancy rate for rental apartments fell for the second year in a row to 2.4% this year.

The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the USA dim the appeal of risky assets.

Some market analysts treated such remarks as an indication of a possible pause in rate hikes, since the neutral rate could be used to decide a target area for the central bank to complete its normalization cycle.

The Fed members' comments could comfort investors, who rallied on Wall Street after Fed Chairman Jerome Powell on Wednesday said interest rates were already close to estimates of "neutral" - the rate which neither accelerates not restrains economic activity - meaning they might not have to rise much higher. He also noted that the economy is close to both maximum employment and price stability, assuaging some lingering concerns from October's volatility. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY. Speaking on Wednesday, Powell said the effects of Fed policy decisions "may take a year or more to be fully realized". The benchmark rate, now at 2.00-2.25 percent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 percent.

According to Joseph LaVorgna, chief Americas economist at Natixis, "the Fed needs to stop raising rates".

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

The continued strength of the American economy has made it more likely that the Fed will stick to its plans to raise rates in December, as part of its strategy to keep growth on an even keel into 2019.

On Wednesday, Powell also emphasised these uncertainties.

Like this: