Fed Chairman Powell, “Rate Hikes Are Not Automatic in Healthy Economy”
Fed Chairman Jerome Powell cast a bright picture of the US economy Wednesday and appeared to suggest that the Fed might consider a pause in its interest rate hikes next year to assess the impact of its credit tightening.
Chairman Powell’s comments ignited a rally on Wall Street, with the DJIA spiking after his dovish remarks were released.
Referring to the Fed’s gradual increases in its benchmark rate, Chairman Powell said, “there is no preset policy path.” Rather, he said, the Fed will assess the most recent economic and financial data in deciding whether or how fast to keep raising rates.
“We know that things often turn out to be quite different from even the most careful forecasts,” Powell said in a speech that comes in the wake of last week’s volatile market selloff. “Our gradual pace of raising interest rates has been an exercise in balancing risks.”
Speaking to the Economic Club of New York, the Fed Chairman also suggested that while some corporate debt loads have reached riskier levels, “we do not see dangerous excesses in the stock market.”
The central bank’s rate increases have gradually raised borrowing costs for consumers and businesses. Any slowdown or pause in its rate hikes would be welcome news for a stock market that has been battered by fears that the Fed’s continued credit tightening could end the long bull market.
While noting that some forms of corporate debt levels have become concerning, Chairman Powell said the financial system and markets appear far sturdier than they did before the Y 2008 crisis.
The Fed Chairman said the central bank is monitoring potential vulnerabilities in the banking system to ensure its continued stability.
“We see no major asset class,” Chairman Powell said, “where valuations appear far in excess of standard benchmarks.”
In an appearance earlier this month, Powell cited strong annual economic growth above 3% and unemployment at a 47 year low of 3.7%. Those trends, he said, were coinciding with inflation remaining “right on target” at the Fed’s goal of 2% annual price increases.
But Chairman Powell noted a number of risks, including the slowdown in global growth and the fading economic benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed’s own rate hikes.
Many economists also worry about potential economic damage caused by President Donald Trump’s trade dispute with China and other nations.
For his part, President Trump has sought to shift blame for any economic troubles to the Fed and its rate increases. In an interview Tuesday the President complained about Chairman Powell, his choice to lead the Fed.
After keeping rates at a record low near Zero for 7 years, 3 years ago the Fed began gradually raising rates, including three hikes this year. Those increases have raised its benchmark rate to a still-historically-low range of 2 to 2.25%.
Higher interest rates tend to slow economic growth over time as well as pressure stock prices. For those reasons, this year’s hikes have made the Fed the target of unusual public attacks from Trump — criticism that has accelerated with the past month’s sharp declines in the stock market. Trump has complained that the Fed is threatening to undo the economic stimulus being provided by the tax cuts and that its rate hikes are unnecessary because inflation has remained relatively low.
In its most recent projections, the Fed forecast that it would raise rates in December for the 4th time this year, followed by 3 more hikes in Y 2019.
Analysts think a rate hike next month is certain. But Shayne and I believe that on this dovish statement 3 rate increases for next year look less certain.
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