Call ‘em crazy, but Fed officials likely to keep raising rates

WASHINGTON: A stock sell- off, rising trade tension with China, slower global growth and verbal pressure from the White House are unlikely to dent the US Federal Reserve’s rate hike plans in an economy performing in line with the central bank’s forecasts.

A bumpy 48 hours included an 800 point drop in the Dow Jones Industrial Average and hefty declines in other stock indexes, a forecast of slowing global growth from the International Monetary Fund, and a broadside from President Donald Trump in which he called the Fed ‘crazy,’ ‘ loco,’ and ‘ too aggressive’ in raising rates.

But data since the Fed’s last meeting in September has been in line with the central bank’s portrait of an economy in which historically low unemployment will be coupled with inf lation running near the central bank’s 2 per cent target for the foreseeable future.

Gradual rate increases – moving the overnight federal funds rate over the next year and a half or so from between 2 and 2.5 per cent now to around 3.4 per cent – would slow the economy a bit, but keep inflation in check during a record- setting era of recessionfree growth spanning the Obama years and Trump’s first term.

Compared to the recent years in which the Fed has battled both high unemployment and weak inflation, it is a remarkably rosy scenario that, most analysts and officials have said, justifies what the Fed has done so far and offers little reason to shift gears.

Even chief Trump economic adviser Larry Kudlow, qualifying the president’s opinion of Fed chair Jerome Powell’s Fed, said he thought the central bank was ‘on target,’ and that its ability to raise rates was a sign of ‘economic health, that is something to be welcomed and not feared.’

The unemployment rate in September dipped to 3.7 per cent, a level not seen in nearly half a century, while an inf lation report indicated the pace of price increases remained under control around the Fed’s target.

Even the sharp rise in longterm bond yields that has spooked equity investors this week is a sign of an economy working more normally than it has since the financial crisis.

Indeed depressed long- term rates had led some Fed officials to worry that short- term rates might rise above them and cause the sort of bond yield ‘inversion’ that precedes recession. But the spread between short- and longterm debt is now widening.

Trump’s comments and the stock slide “won’t be enough to prevent the ‘crazy’ Fed from raising rates again in December,” Capital Economics analysts wrote after the last consumer price data, which, while slightly below expectations, were still roughly in line with the Fed’s plans.

Forecasters with Macroeconomic Advisers left their outlook for annualised gross domestic product growth unchanged at 3.7 per cent for the third quarter and 2.6 per cent for the fourth quarter. — Reuters