Fed pol­icy-mak­ers sig­nal U.S. rate-hike path at a turn­ing point


In the clear­est yet of a se­ries of sig­nals from the U.S. cen­tral bank that mon­e­tary pol­icy is at a turn­ing point, a Fed­eral Re­serve pol­icy-maker on Fri­day backed in­ter­est rate hikes in the “near term,” but sig­nalled in­creas­ingly less cer­tainty ahead.

Speak­ing at an event in Wash­ing­ton, Fed­eral Re­serve gover­nor Lael Brainard said the eco­nomic pic­ture was broadly pos­i­tive, but that risks were in­creas­ing over­seas and in the cor­po­rate debt mar­kets at home. Tail­winds, she said, are fad­ing as global growth slows, fi­nan­cial con­di­tions tighten, and the boost from fis­cal stim­u­lus mod­er­ates.

“The grad­ual path of in­creases in the fed­eral funds rate has served us well by giv­ing us time to as­sess the ef­fects of pol­icy as we have pro­ceeded,” she told the au­di­ence. “That ap­proach re­mains ap­pro­pri­ate in the near term, al­though the pol­icy path in­creas­ingly will de­pend on how the outlook evolves.”

Speak­ing less than an hour later, St. Louis Fed­eral Re­serve bank pres­i­dent James Bullard re­peated his call for the Fed to pause its cur­rent cy­cle of in­ter­est rate in­creases, say­ing the cen­tral bank may al­ready be re­strict­ing the econ­omy and not­ing that in­fla­tion ex­pec­ta­tions are drift­ing down­ward.

Mr. Bullard next year will be a vot­ing mem­ber on the Fed’s pol­icy-set­ting com­mit­tee.

Traders con­tinue to bet on a Fed rate hike in two weeks, when pol­icy-mak­ers will next meet and, im­por­tantly, re­lease fresh fore­casts for the rate path for next year and be­yond. As of just a few months ago, Fed pol­icy-mak­ers had in­di­cated they would prob­a­bly in­crease in­ter­est rates three times in 2019.

But with re­cent data show­ing the hous­ing mar­ket slow­ing, job gains cool­ing, and in­fla­tion giv­ing no signs of ris­ing above the Fed’s 2-per-cent tar­get, there are plenty of “rea­sons for hint­ing at a pause in March,” Cor­ner­stone Macro economist Roberto Perli said in a note on Fri­day.

Since the mid­dle of last month, Fed pol­icy-mak­ers have pointed to the need to re­con­sider what have been steady quar­terly rate hikes for most of the past two years.

It be­gan with Fed chair Jerome Pow­ell telling Dal­las Fed chief Robert Ka­plan in an on­stage in­ter­view that pol­i­cy­mak­ers may need to “slow down” amid in­creas­ing un­cer­tainty, just as some­one feel­ing their way through a dark room filled with fur­ni­ture would need to do.

Later that month, he re­peated that metaphor and noted rates are only “just be­low” a neu­tral level, a re­mark that sent mar­kets soar­ing as traders took it to mean fewer in­ter­est-rate hikes ahead.

Then, in min­utes of the Fed’s Novem­ber meet­ing re­leased last week, pol­icy-mak­ers were clear they are pre­par­ing to ditch a long-stand­ing prom­ise for “fur­ther grad­ual in­creases” to the Fed’s pol­icy rate.

It was so even with New York Fed pres­i­dent John Wil­liams, who be­lieves so deeply in the need for slow but steady rate in­creases he used to give away T-shirts printed with the word “grad­ual.” Late on Thurs­day, he noted that tar­iffs have hit busi­ness con­fi­dence and could slow eco­nomic growth.

U.S. Pres­i­dent Don­ald Trump has taken aim at Mr. Pow­ell for raising rates.

Stop­ping af­ter just one or two more rate hikes, when rates would be at most be­tween 2.5 per cent and 2.75 per cent, would make the Fed’s job harder by giv­ing it less lee­way to cut rates to off­set any fu­ture down­turn.

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