Fed eyes rate hikes

Signs of US growth over­heat­ing miss­ing

The Star Malaysia - StarBiz - - Foreign News -

AT­LANTA: The Amer­i­can job mar­ket looks hot. Some parts of the econ­omy do not.

That’s the dilemma fac­ing the Fed­eral Open Mar­ket Com­mit­tee (FOMC) as it pre­pares a likely in­ter­est rate in­crease in two weeks – the Fed­eral Re­serve’s ninth hike in three years – and to sig­nal more to come in 2019.

With re­cent de­clines in stocks, cheaper oil, soft­en­ing house prices and fall­ing long-term bond yields, the world’s largest econ­omy is down­shift­ing af­ter a few quar­ters of above-av­er­age growth fu­elled by higher gov­ern­ment spend­ing and tax cuts. Faced with the slow­down and a cen­tral bank that’s still rais­ing rates, Pres­i­dent Don­ald Trump may be ask­ing a fair ques­tion with his Fed crit­i­cism: Where are signs the econ­omy is too hot?

“In the ab­sence of any ev­i­dence of over­heat­ing, it’s hard to see why the FOMC would want to raise rates above neu­tral and risk slow­ing the econ­omy even more than it is al­ready likely to slow on its own given the wan­ing fis­cal stim­u­lus,” said Roberto Perli, a part­ner at Cor­ner­stone Macro LLC in Wash­ing­ton and a for­mer Fed economist.

Perli’s ref­er­ence to a neu­tral rate is Fed par­lance for the pol­icy set­ting that’s nei­ther boost­ing nor slow­ing growth. Right now, with the fed­eral funds rate at 2% to 2.25%, Fed of­fi­cials are split about whether they’re as lit­tle as one or as many as five rate hikes un­der neu­tral.

Stay­ing be­low neu­tral is the equiv­a­lent of step­ping on the mon­e­tary ac­cel­er­a­tor. Go­ing above it means ap­ply­ing the brakes.

Fed chair­man Jerome Pow­ell said last week the Fed was near­ing the range of es­ti­mates that rep­re­sent a neu­tral set­ting.

As the US ex­pan­sion edges closer to the long­est on record next year, some in­ter­est-rate sen­si­tive parts of the econ­omy – au­tos and hous­ing, in par­tic­u­lar – are show­ing signs of weak­ness. Growth av­er­aged close to 4% in the past two quar­ters, the fastest back-to-back pace since 2014, boosted by a US$1.5 trillion tax over­haul and a US$300bil spend­ing in­crease.

Yet some com­pa­nies aren’t feel­ing the boom times. Gen­eral Mo­tors Co said on Nov 26 it would cut 14,000 salar­ied and fac­tory work­ers and close seven fac­to­ries world­wide by the end of next year.

Lux­ury home­builder Toll Broth­ers Inc re­ported Tues­day its first drop in or­ders since 2014. In Cal­i­for­nia, which is fac­ing an af­ford­abil­ity cri­sis and a de­cline in for­eign de­mand, or­ders fell 39%.

Pow­ell has em­pha­sised the over- all US econ­omy is strong, and the out­look is favourable de­spite pock­ets of weak­ness. The Fed bases its rates fore­casts on its out­look for the econ­omy, and the tight­en­ing now is aimed at pre­vent­ing ex­cesses from oc­cur­ring a year or more down the road.

“You don’t need to worry about over­heat­ing to ra­tio­nalise the rate hikes to date,” for­mer Fed vice-chair­man Alan Blinder said. “Up to now, the Fed is just step­ping less hard on the gas pedal.”

If there is a mar­ket that’s near­ing a boil, it’s the job mar­ket, with an the un­em­ploy­ment rate at half-cen­tury low of 3.7%. While em­ploy­ers have cited short­ages of qual­i­fied skilled work­ers, wage gains have been mod­er­ate and there’s no in­di­ca­tion they are feed­ing into in­fla­tion.

“The Fed can’t sit and wait un­til wages and prices over­heat,” said Stephen Stan­ley, chief economist at Amherst Pier­pont Se­cu­ri­ties LLC.

That’s not ev­i­dent in prices. The Fed’s pre­ferred mea­sure of in­fla­tion met its 2% tar­get in Oc­to­ber, though ex­clud­ing volatile food and en­ergy, the core mea­sure rose 1.8%. A plunge in oil is likely to weigh on price mea­sures in the fourth quar­ter.

The Fed is also mon­i­tor­ing fi­nan­cial mar­kets and as­set prices, which

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