US central bankers believe another interest rate hike is due “fairly soon,” boosting widespread expectations the Federal Reserve will raise lending costs next month, according to meeting minutes released on Thursday.
But policymakers may be divided over what to do after that, with some worried that raising rates after December could “unduly slow” the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.
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.
The Fed members’ comments initially appeared to comfort investors.
Major Wall Street indices turned positive shortly after the announcement but that rally soon fizzled, with stocks ending in the red.
Stocks had also rallied on Wednesday after Fed chairman Jerome Powell 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.
But policymakers also say they may soon begin to give the public fewer clues about their plans, striking language from future statements about “further gradual increases” and instead keeping a close eye on developments in the economy.
With last year’s deep tax cuts and fiscal stimulus from Congress, the world’s largest economy continues to hum, producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed’s 2% target.
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.
As a result, “almost all” Fed members said a rate hike “was likely to be warranted soon.” But some expressed “uncertainty” about how long the Fed should wait before raising again.
And a “couple” said the Fed might be near the neutral rate, meaning more rate hikes “could unduly slow the expansion,” driving down inflation.
October’s Wall Street sell-off and a rise in bond yields tightened financial conditions while some sectors most sensitive to interest rates, such as the housing sector, had already begun to slow.
But other participants preferred a wait-and-see approach, noting that the future held “upside” and “downside” risks, such as slowing global growth on one hand and faster inflation on the other.
Currently, the Federal Open market Committee forecasts three quarter-point hikes for next year after a December increase, which is virtually guaranteed.
The neutral rate can seem like a central bankers’ “goldilocks” setting for monetary policy, neither so low as to allow excess inflation nor so high as to weigh on the economy.
Nevertheless, it is a tricky concept: economists put the range between 2.5% and 3.5%. The US Federal funds rate range is now 2.0 - 2.5%.
And some economists say the markets misread Powell.
Tom Porcelli of RBC Capital markets said investors were wrong to interpret Powell’s words as “dovish.”
“Powell is not suggesting that since they are just below the range they may stop soon. All he is doing is pointing out an obvious idea,” Porcelli wrote in a client note.
But Powell’s most recent words should be taken along with other recent remarks in which he showed concern for the global economic outlook.
He said then that growth abroad was likely to weaken and that US fiscal stimulus, which had goosed consumption, would soon fade.
On Wednesday, Powell also emphasised these uncertainties.
“We also know that the economic effects of our gradual rate increases are uncertain and may take a year or more to be fully realised,” he said, adding that there was “no preset policy path.”
“We will be paying very close attention to what incoming economic and financial data are telling us.”
According to Joseph LaVorgna, chief Americas economist at Natixis, “the Fed needs to stop raising rates.”
“The neutral rate is an absurd concept. We already passed that, as the housing market shows,” he said on CNBC, referring to this year’s steady decline in home sales and construction — something analysts partly blame on higher mortgage rates.
October inflation figures published on Thursday showed upward price pressures right at the Fed’s two percent target while consumers continued to spend at a brisk pace.
The rate hike likely coming on December 19 would raise the benchmark lending rate, which influences borrowing costs throughout the wider economy, to 2.5 percent.
But from there, paths diverge. Oxford Economics now predicts two increases in 2019, rather than three, while JP Morgan and Goldman Sachs see four. Though more revisions seem likely.
And any signs of an increase continued to be met by vituperation from President Donald Trump, who has denounced the current tightening cycle at the Fed, which Congress made independent of the White House.
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