Fed may pause rate hike moves next year

Federal Reserve Chairman Jerome Powell has laid out a scenario for a pause in the central bank’s interest-rate hiking campaign sometime next year by highlighting potential headwinds to the US economy.

While generally upbeat about the outlook, Powell listed three possible challenges to growth in 2019: slowing demand abroad, fading fiscal stimulus at home and the lagged economic impact of the Fed’s past rate increases.

The central bank is widely expected to raise rates for the fourth time in December — and Powell did nothing to disabuse investors of that notion, playing down the significance of the recent stock market sell-off and playing up the economy.

But his comments about possible drags on growth in 2019 raise questions about how many times the Fed will boost rates. The median forecast of policymakers in September was for three increases of a quarter percentage point each in 2019.

That masks a divergence of views, with 12 of the policymakers evenly split among two, three or four hikes. Federal Open Market Committee members will update their rate and economic forecasts at their December 18-19 meeting.

Morgan Stanley chief US economist Ellen Zentner said she expects the FOMC to follow a December rate hike with two more increases next year, then hold policy steady. Behind that call: an expected slowdown in growth.

Zentner’s forecast would leave the Fed’s funds rate target at 2.75 to 3 per cent, near the level policymakers reckon is neutral for the economy.