Published: Sun, December 02, 2018
Markets | By Otis Pena

Powell: US economy and banks seem sturdy but face some risks

Powell: US economy and banks seem sturdy but face some risks

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

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.

Participants agreed that an additional rate increase was "likely to be warranted fairly soon".

During the Fed's November meeting, participants discussed a number of risks that could sweep away their rosy economic outlooks and change the path of policy, including "high levels of uncertainty" over the impact fiscal and trade policies on growth and inflation.

As for future hikes, some expressed uncertainty about the timing.

Minutes of the November meeting show policymakers ticking off a series of issues, including a tightening of financial conditions, global risks, "and some signs of slowing in interest-sensitive sectors", that had begun weighing on their view of the economy.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected a year ago to oversee the world's most powerful central bank a "threat".

Referring to the Fed's gradual increases in its benchmark rate, Powell said, "there is no preset policy path". But signs of a slowdown overseas and almost two months of market volatility have clouded an otherwise mostly rosy U.S. picture in which the economy is growing well above potential and unemployment is lowest since the 1960s. But he said the Fed's gradual increases balanced the risks between raising too much and not enough. But most analysts see that as farfetched.

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Trump further took aim at Powell in a Wall Street Journal interview on Monday that mainly dealt with the trade conflict with China.

Mr Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment, and inflation near its 2 per cent target. "Such a change would help to convey the committee's flexible approach".

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.

"I do think over time folks will have to get used to the idea that we can and will move at any meeting", said Powell in a question-and-answer session in Dallas.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said. "You slow down. You maybe go a little less quickly. I think that's what we've been doing". That would bring it to about the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 per cent to 3.5 per cent. Some want to see evidence that job growth is slowing, holding the unemployment rate at its current low levels, before they pause rate increases. Those increases have raised its benchmark rate to a still-historically-low range of 2 per cent to 2.25 per cent.

And some economists say the markets misread Powell.

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.

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