Fed Chair’s comments on slower hikes to boost EMs

Powell defends Fed charge hikes amid Trump onslaught			 0					By		Marta Subat

U.S. Federal Reserve Chair Jerome Powell injected investors with a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed's three-year tightening cycle is drawing to a close.

Powell said on Wednesday that USA interest rates were "just below" neutral, less than two months after saying rates were probably "a long way" from that point. On October 3, he said rates were "a long way" from neutral levels. His remarks Wednesday appeared to suggest to this audience that he might stop sooner or move more slowly.

The upcoming interest rate decision-which will come December 19- will serve as a big signal for both the Fed's conviction for continued economic growth as well as the equity market's resilience to yet another hike.

"The markets really got a head fake in October, (but on Wednesday) he strongly walked back those expectations", said Scott Anderson, chief economist at Bank of the West.

In October 2015, when the Yellen Fed was navigating the hard transition from years of super-low interest rates to a cycle of rate hikes, she got the worst grade of her tenure - an average 2.27 out of 5.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

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But minutes from the Fed's November 7-8 policy-setting meeting, released on Thursday, as well as remarks over the last two weeks, point to a reassessment of the Fed's longstanding promise of "further gradual rate increases" that would extend two years of almost uninterrupted quarterly tightening. 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".

On Wednesday, Mr. Powell pointed to the range of neutral-rate projections submitted by 15 Fed officials at their policy meeting in September, varying from 2.5% to 3.5%. But Powell's comments are prompting speculation among many investors that a looser policy may lie ahead.

In his speech, which was focused on the Fed's assessment of the health of the US financial system, Powell said it is "important to distinguish between market volatility and events that threaten financial stability".

One additional twist investors will need to adjust to next year will be the potential for rate changes at any of the Fed's monthly gatherings. "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing".

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly. Three of those increases have been under Powell.

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. Currently, the fed funds futures are pricing in an 83 percent chance of a December hike and one more in 2019. But that approach is no longer appropriate, Powell said.

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