US Fed official urges pause on rate hikes with inflation under control

Was Post Fed Chair Speech Rally a Market Overreaction

The minutes showed a couple of participants felt the benchmark fed funds rate "might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity". Investors interpreted his remarks as evidence that the Fed might consider pulling back from quarterly rate hikes.

The Fed said that nearly all of its policymakers agreed that "a gradual approach to policy normalization remained appropriate" in its newly released minutes of the Federal Open Market Committee (FOMC) meeting which was held from November 7 to November 8.

A December increase would bring the policy rate close to the bottom of the 2.5% to 3.5% range policy makers estimated as neutral.

The central bank expects the unemployment rate to remain historically low next year.

Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year.

Market reaction reflected investors' fears the Fed might end up making the kind of mistake Powell talked about - tightening policy too much because of a false read on where neutral is, at a time when clouds had begun to form on the economic horizon.

Speaking at the Economic Club of NY on November 28, Jerome Powell outlined the Fed's decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation's financial stability.

Investors welcomed his remarks because they appeared to retreat from a comment he made in early October describing the Fed's benchmark rate as a "long way" from a neutral level - which implied to some listeners that Mr. Powell planned to keep raising rates for a while.

The minutes from the rate-setting Federal Open Market Committee's November 7-8 meeting showed a rising level of uncertainty in the central bank about the near future. Powell, who took over as Fed chairman in February, has said he wants to provide the public with "plain English" descriptions of what the central bank is up to.

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"If you look down the road, you see challenges ahead, and they're challenges that are typical in a cycle", said Powell speaking earlier this month at the Federal Reserve Bank of Dallas.

"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell".

"What do you do?" said Powell in NY.

"Participants also commented on how the Committee's communications in its post-meeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rate", the minutes said.

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon on Wednesday.

The Fed raised its benchmark rate in March, June and in September, with the last increase putting it in a range of 2 per cent to 2.25 per cent.

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

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