US Fed official urges pause on rate hikes with inflation under control

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After several years of steadily raising interest rates, Federal Reserve officials discussed this month a more flexible policy of setting rates.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy.

Mr. Powell didn't provide any more guidance on the likely path for rates, and he noted they remain low by historical standards.

"His description highlights the significant uncertainty around estimates of neutral, a theme he mentioned at his speech at Jackson Hole in August", Jan Hatzius, chief U.S. economist for Goldman Sachs, wrote in a note to clients Wednesday.

Mr. Powell's October remark came during an unscripted moment at a moderated discussion in Washington.

Minutes released yesterday from the Fed's November 7-8 policy meeting showed disagreements about the path of interest rates, with some policymakers worrying that tightening too fast could stem economic growth. Some listeners thought his tone conveyed greater conviction about continuing rate increases.

"Recent public comments suggest Fed officials are amenable to parking the fed funds rate near neutral, which most FOMC participants estimate near 2.9 percent to 3 percent, and then pausing to assess the health of the economy as it adapts to less accommodative policy".

That "just below" phrasing seemed to indicate that the Fed is almost done raising rates for the time being.

His clarification Wednesday didn't otherwise indicate any substantive change in the Fed's policy plans. He will have an opportunity to do that next week in testimony on Capitol Hill.

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Next month's expected quarter-point increase would lift the central bank's target for the federal funds rate to a range of 2.25 percent to 2.5 percent. At best, the coming meeting could see a shift in the majority of Fed representatives surveyed from three to two rate hikes in 2019.

Mr Powell's nuanced comments eased investor concerns about 2019.

While the speech had "cleaned up after Powell's sloppy language last month", markets may have reacted too strongly to the comments, said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

The minutes of the Fed's November 7-8 meeting showed that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.

Mr. Powell repeated a relatively upbeat view of the economic outlook, including low unemployment and stable inflation. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY. But turning to financial stability, the main topic of his speech, he added, "We know that things often turn out to be quite different from even the most careful forecasts".

"Our gradual pace of raising interest rates has been an exercise in balancing risks", Mr Powell said.

The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, Powell said.

Hiking too forcefully before necessary could risk causing a recession in the US economy, he warned.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.

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