FED TO PAUSE RATE HIKE IN 2019?
US central bank may slow tightening cycle on waning growth, trade war, tame inflation
THE United States Federal Reserve (Fed) is likely to raise interest rates this week but policymakers have begun to signal they may take it a bit slower next year.
Waning growth, a trade war, tame inflation and an increasingly scary geopolitical scene mean the central bank could make clear they plan to slow or even pause the current tightening cycle — instead taking a wait-andsee approach until the economic picture becomes clearer.
Since October, Fed officials have watched Wall Street take a wild ride, alternately diving and rallying as public remarks from chairman Jerome Powell veered between indicating gradual hikes would continue or pause.
In recent days, economists have begun to cut their forecasts for the number of rate hikes they expect next year to just one or two from as many as four.
Fed officials in September forecast three increases but that could be revised as well in the new projections to be released on Wednesday.
At last month’s meeting, members of the Fed’s rate-setting Federal Open Market Committee argued they should signal they were close to the end of the cycle by deleting the words “further gradual increases” from postmeeting statements.
That would mark a significant shift in the Fed’s messaging of the last three years that maintained a steady drumbeat telling markets to expect “gradual adjustments” to rates.
But economists say the Fed is keenly aware of the spectre of slowing growth in China and Europe, a chaotic Brexit, political turmoil in France and Italy’s budget woes.
In the US, job growth has remained strong this year but inflation has settled at the Fed’s two per cent target, despite fears the strong economy might ignite prices. Add to this the fading boost from recent tax cuts and government spending, and expectations US growth will slow, and the future can seem highly uncertain.
“I share the notion that things are not quite as strong as they looked a few months ago but we don’t know anything very definitively,” said former Fed vice-chair Alice Rivlin. “I think they’re saying, ‘We’ll be very careful and we’ll play it how we see it’.”
Changing expectations allows the Fed to pause without roiling financial markets with a surprise move.
The Fed’s mandate is not protect stock market investors but to maximise employment at sustainable levels while keeping a lid on inflation.
Nevertheless, stunning gyrations on equities markets can worry policymakers, because an outright crash can sap consumer and business confidence, making households and companies cut spending, which is never good for gross domestic product growth.
Wall Street crumbled from record heights in early October after the Fed chairman said benchmark interest rate was “a long way” below neutral — a rate that is neither stimulating nor restraining growth — suggesting steady rate hikes would continue.
But Powell changed his tune just a few days later, saying the key policy rate in fact was “just below” neutral, suggesting it need not rise too much higher, and that led to a stocks rally on November 28.