Fed officials express caution about pace of future hikes

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Economists and investors have been scratching their heads this week over signals from the Federal Reserve, which left the future of USA monetary policy open to broadly divergent interpretations.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth", said Powell. The U.S. rates market is now hinting at a halt in tightening in 2019 and some strategists believe that traders are ill-positioned for increases.

Powell's comments came as speculation was already mounting that the US central bank might considering pausing its hiking cycle amid slowing global growth and increased market volatility. From the Fed's perspective, the interest rate hike in December will probably lead to an interest rate level that will no longer justify the automatism of a quarterly interest rate hike.

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

After keeping rates at a record low near zero for seven years, the Fed three years ago began gradually raising rates, including three hikes this year.

Nevertheless, it is a tricky concept: Economists put the range between 2.5 per cent and 3.5 per cent. He has more recently called the Fed "crazy" and "loco" over recent interest-rate increases.

Nevertheless, the dovish interpretation of Powell's comments was traded across financial markets on Wednesday. "The market is putting too much weigh on the dovish arguments here; I don't think that is what he meant to signal". His remarks Wednesday appeared to suggest to this audience that he might stop sooner or move more slowly. "All he is doing is pointing out an obvious idea", Porcelli wrote in a client note.

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Earlier in November, Powell was optimistic about the state of the economy, citing strong annual economic growth exceeding 3 percent and unemployment at a near five-decade low of 3.7 percent.

On Wednesday, Powell also emphasised these uncertainties.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral. "We will be paying very close attention to what incoming and financial data are telling us".

"The neutral rate is an absurd concept".

But Fed members agreed they would offer fewer signals about the future in their public statements, insisting, as Powell did this week, that they would instead monitor economic data and respond accordingly.

Other Fed watchers still expect at least one or two rate increases in 2019 before the central bank pauses to observe how the economy is performing.

But from there, paths diverge. Those at Goldman Sachs Group Inc. and JPMorgan Chase & Co. predict four hikes next year, while their counterparts at Morgan Stanley and Citigroup Inc. forecast two.

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