Economy

Fed Chair’s comments on slower hikes to boost EMs

Fed Chair’s comments on slower hikes to boost EMs”

U.S. Federal Reserve Chair Jerome Powell injected investors with a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed's three-year tightening cycle is drawing to a close.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth", Powell said while speaking at the Economic Club of NY.

"A couple of participants noted that the federal 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 and put downward pressure on inflation and inflation expectations", said the minutes.

Chairman Jerome Powell's Wednesday speech to the Economic Club of NY was hardly as hawkish as some had expected.

The need for "further gradual rate increases" as appropriate to keep the current recovery on track has been a staple of recent Fed policy statements as the central bank nudged rates back toward more normal levels after a decade near zero.

In the week ahead, the Fed will see one of the last big economic statistics before its next interest rate decision.

But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes.

"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said. Some listeners thought his tone conveyed greater conviction about continuing rate increases.

Hong Kong - The dollar extended losses in Asia while equities rallied after the head of the Federal Reserve hinted at a softer pace of interest rate hikes, though investors remain wary about the weekend's crunch trade talks between Donald Trump and Xi Jinping.

The minutes also contained a lengthy discussion of the Fed's operating strategy and how that links to banks' preference to hold abundant excess reserves after the financial crisis. With previous hikes in March, June, and September, one more rate hike this year would put 2018's rate of increases on par with 2006, the last year the Fed increased rates prior to the crash.

There wasn't much of a reaction in the financial markets on Thursday to the minutes from the Fed's early November meeting.

Analysts at Westpac explain that the U.S. equity markets like the fact that the Fed Chairman Powell appears open to a slower pace of monetary tightening. "But we know that things often turn out to be quite different from even the most careful forecasts".

In remarks delivered two weeks ago on a late evening in Dallas, Powell refined his summertime message, explaining that just as someone in a room where the lights suddenly go out must "slow down" to avoid running into furniture, the Fed must do the same when nearing neutral to avoid missing signals from economic data. The buildup of corporate debt amid weakening lending standards caught the attention of the committee. That suggested to many investors that fewer rate increases might be on the way.



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