Economists, Wall Street split on Federal Reserve rate signals

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The general consensus is that a rate hike in December will most certainly occur as the CME Group's FedWatch Tool, an algorithm that calculates the probability of a rate hike in a given month, is now showing an 82.7% chance the Federal Reserve will institute a fourth rate hike to end 2018.

But policymakers also say they may soon begin to give the public fewer clues about their plans, striking language from future statements about "further gradual increases" and instead keeping a close eye on developments in the economy. But Powell's comments are prompting speculation among many investors that a looser policy may lie ahead.

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

On Thursday, the Fed's Open Market Committee published the minutes of a meeting in early November.

But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes.

Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year.

One irony of the market reaction to Mr. Powell's word choices is that he has spent considerable energy during his tenure as Fed chairman trying to emphasize the uncertainty of these estimates and to fashion a more plain-spoken approach to central-bank communications. The Fed's benchmark federal-funds rate since then has been between 2% and 2.25% - or just below the lowest estimate. And the headline unemployment rate drops further.

In remarks delivered two weeks ago on a late evening in Dallas, Powell refined his summertime message, explaining that just as someone in a room where the lights suddenly go out must "slow down" to avoid running into furniture, the Fed must do the same when nearing neutral to avoid missing signals from economic data.

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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.

Powell also underscored the importance he places on communicating the Fed's thinking in a way that people will understand. With previous hikes in March, June, and September, one more rate hike this year would put 2018's rate of increases on par with 2006, the last year the Fed increased rates prior to the crash.

Mr. Powell repeated a relatively upbeat view of the economic outlook, including low unemployment and stable inflation.

But he cautioned that things could turn out a lot differently than the Fed expects.

The Fed's current pattern of raising rates gradually - roughly once a quarter over the past two years - is an effort to balance two risks.

"What do you do?" said Powell in NY.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", 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. "In addition, other measures of underwriting quality have deteriorated, and leverage multiples have moved up". The buildup of corporate debt amid weakening lending standards caught the attention of the committee.

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