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REPEAT:MNI POST-FOMC:Fed Sticks to Its Guns on More Rate Hikes

Repeats Story Initially Transmitted at 23:45 GMT Dec 19/18:45 EST Dec 19
By Jean Yung
     WASHINGTON (MNI) - The Federal Reserve on Wednesday said it remains
prepared to raise interest rates a few times next year even as it transitions to
a more flexible, data-dependent approach to policymaking.
     Chair Jay Powell conceded little in the face of enormous pressure from
markets and President Trump, reiterating the Fed's confidence in the upbeat
economic outlook and reaffirming the need for "some further gradual increases"
in rates. With above-trend growth and very low unemployment, the recent market
volatility and tightening in financial conditions "have not fundamentally
altered the outlook," Powell said. 
     There is "significant uncertainty" over both the policy path and the
endpoint of the current tightening cycle, the Fed chief said. But, having now
reached the "bottom end" of the range of estimates for the neutral rate, it
makes sense to watch the data closely and adjust policy accordingly. 
     --NOT SO DOVISH
     Anxious markets had expected a strongly dovish tone out of the December Fed
meeting, even contemplating the possibility that the Fed would get cold feet on
an already price-in rate increase.
     Instead, the Fed followed through on the fourth rate hike for the year and
made only a slight tweak to its forward guidance on gradual tightening. The
majority on the Federal Open Market Committee are still looking for two or more
rate increases next year, even as the median projection shifted down to two
hikes.  
     As long as the economy faces tailwinds including stimulative fiscal policy
and tight labor markets, the Fed will continue to remove monetary stimulus,
Powell said. 
     --TIGHTER FINANCIAL CONDITIONS
     The Fed's actions signal it does not want to be seen as too responsive to
financial markets. 
     The FOMC said Wednesday it would "continue to monitor global economic and
financial developments and assess their implications for the economic outlook,"
a reference to recent turmoil in equities and fears over slowing global growth
and trade uncertainty. But the phrase also reminds markets that the Fed cares
about asset prices only insofar as they actually translate into real economic
variables. 
     "What matters for the broader economy is material changes in a broad range
of financial conditions that are sustained for a period of time," Powell said. 
     Financial conditions have tightened and "have become less supportive of
growth," he said, but the modest revisions to the dot plot now incorporates
those changes. 
     "That's why the forecast for growth and inflation went down a little bit,"
he said. "So we also took down our rate forecast," and "we are going to be
watching carefully to see as those things develop." 
     --RESTRICTIVE STANCE
     It is now appropriate for Fed policy to be at neutral, but Powell remained
circumspect when asked to opine on when policy might move into restrictive
territory. 
     The FOMC projects rates to stand at 2.9% by the end of 2019, a tenth above
the committee's latest median estimate of the neutral rate at 2.8%. By 2020 and
2021, officials expect the fed funds rate to rise further to 3.1%. 
     But Powell stressed the range of views on whether it would be appropriate
to "go past neutral" and the "real uncertainty" about the "pace and destination"
for further rate increases.  
     Inflation has again surprised to the downside to end the year, albeit by a
small amount, he said, meaning the Fed has yet to declare mission accomplished
on half of its dual mandate. 
     "People have disparate views on what the endpoint could be," he said.
"Ultimately it will depend on what the circumstances are." 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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