Fed has a complicated job after likely December hike

A hike would lift top benchmark target to 2.5% — the bottom of a neutral policy setting

For Federal Reserve Chairman Jerome Powell, the days of straightforward policy meetings are numbered.

An interest-rate increase at the December 18-19 gathering of the US central bank is priced at around 70 per cent odds and the case for a move, backed up by comments from Powell and his colleagues last week, is supported by strong economic growth and ultralow unemployment.

But a hike next month would also lift the top Fed’s benchmark target rate to 2.5 per cent — the bottom of officials’ range of estimates for a neutral policy setting that neither spurs nor slows growth. Going forward, officials will have to decide how much higher to go.

“There is this narrative that the Fed is going to keep hiking until something breaks,” said Neil Dutta, an economist at Renaissance Macro Research. “I don’t buy that. Global growth weakness has caught their attention.”

Fed officials in September estimated a range of 2.5 per cent to 3.5 per cent for a neutral policy rate. The Fed’s benchmark policy rate is currently 2 per cent to 2.25 per cent.

Officials including Fed vice-chairman Richard Clarida and Chicago Fed president Charles Evans are not comfortable maintaining a stimulative rate at a time when the labour market is beyond their estimate of full employment and inflation is at their 2 per cent target.

“Being at neutral would make sense,” Clarida told CNBC on Friday. Evans, speaking later in the day, used almost identical language at an event in Chicago. “It makes a lot of sense to at least get back to neutral,” he said.

Current target rate for inflation at the US Fed