Powell hints at slower rate-hike pace

United States Federal Reserve Chairman Jerome Powell cast a bright picture of the U.S. economy Wednesday and appeared to suggest that the Fed might consider a pause in its interest rate hikes next year to assess the impact of its credit tightening.

In what was seen as a shift in tone from remarks last month, Powell said Wednesday that the Fed's series of rate increases had brought policy to "just below" the range of estimates of neutral, where it neither spurs nor restricts the economy.

"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. "Every time we do something great, he raises interest rates".

When interest rates are neutral, the economy is on a sustainable path. Deviations from neutrality can cause booms and busts.

And he said economists estimated the Fed's policy rate - at 2.25 per cent - was "just below" the estimate of neutral, a rate that neither stimulates nor restrains the economy.

"They're making a mistake because I have a gut and my gut tells me more sometimes than anybody else's brain can ever tell me", the president added.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump said in the interview.

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The Dow climbed 617 points, or 2.5 per cent, to 25,366, its biggest gain in eight months.

"Should significant problems arise in China or in EMEs more broadly, spillovers, including dollar appreciation, declines in world trade and commodity prices, and a pullback from risk-taking by investors outside the affected markets, could be sizable", said the Fed in its report.

Trump's blunt public criticism of the Fed is without precedent.

You have to go back nearly half a century to find a president that has threatened the Fed's independence to the extent Mr Trump has. Recep Tayyip Erdogan, the Turkish president, has recently put pressure on the Turkish Central Bank to hold down interest rates - something the bank, to its credit, refused to do.

"I am pleased to say", Powell said Wednesday, "that our economy is now close to both of those objectives".

While he acknowledged the growing concern over increased borrowing by businesses that already carried a high debt load, he said that for now they were "unlikely to pose a threat to the safety and soundness" of the system in the event of a downturn. Investors have been bracing for higher interest rates in the face of possible inflation stemming in part from Trump's trade wars as well as the tax cuts he pushed through Congress late a year ago. The president has blamed the Fed for the steep two-month fall in the stock market and the possibility that his efforts to boost growth with a major tax cut will be thwarted by rising interest rates.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

(Copyright © 2015. All Rights Reserved.)
 
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