The US Federal Reserve is signaling a turning point in monetary policy, as a Fed policymaker on Friday backed interest rate hikes in the “near term,” but nodded to increasingly less certainty ahead.
Speaking at an event in Washington, Federal Reserve Governor Lael Brainard said that the economic picture was broadly positive, but that risks were growing overseas and in US corporate debt markets.
Tailwinds are fading as global growth slows, financial conditions tighten and the boost from fiscal stimulus moderates, Brainard said.
Photo: Reuters
“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded,” she told the audience. “That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.”
Speaking less than an hour later, St Louis Federal Reserve President James Bullard repeated his call for the Fed to pause its cycle of interest rate increases, saying that the central bank might already be restricting the economy and noting that inflation expectations are drifting downward.
“We are at a crossroads in monetary policy,” said Bullard, who next year is to be a voting member on the central bank’s policysetting committee.
With inflation contained and at no risk of breaking out, investors are nervous that the central bank has gone too far, he said.
Market developments and an expected further interest-rate increase means that there is a “real risk” that the US Department of the Treasury market yield curve could invert this month, Bullard said.
The yield curve is said to invert when interest rates on shorter-term debt rise above rates on longer-term debt, which historically portends a recession.
Traders continue to bet on a Fed rate hike in two weeks, when policymakers are to meet next and release fresh forecasts for the rate path for next year and beyond.
As of just a few months ago, Fed policymakers had indicated they would probably increase interest rates three times next year.
However, with data showing that the US housing market slowing, job gains cooling and inflation giving no signs of rising above a 2 percent target, there are plenty of “reasons for hinting at a pause in March,” Cornerstone economist Roberto Perli said in a note on Friday.
Since the middle of last month, Fed policymakers have pointed to the need to reconsider what have been steady quarterly rate hikes for most of the past two years.
It began with Fed Chair Jerome Powell telling Dallas Fed chief Robert Kaplan in an on-stage interview that policymakers may need to "slow down" amid growing uncertainty, just as someone feeling their way through a dark room filled with furniture would need to do.
Later that month he repeated that metaphor and noted rates are only "just below" a neutral level, a remark that sent markets soaring as traders took it to mean fewer interest-rate hikes ahead.
Then last week, in minutes of the Fed's November meeting, policymakers were clear they are preparing to ditch a longstanding promise for "further gradual increases" to the Fed's policy rate.
Kaplan earlier this week called for "patience" on further rate increases.
It was so even with New York Fed President John Williams, who believes so deeply in the need for slow but steady rate increases he used to give away T-shirts printed with the word "gradual." Late on Thursday he noted that tariffs have hit business confidence and could slow economic growth.
President Donald Trump has taken aim at Powell for raising rates. And on Friday Trump's top economic advisor said in an interview on Bloomberg television that he expects the Fed to pause for "quite some time" after December.
Brainard said that rate policy could go either way, as risks are on both sides of the economy's likely growth path.
Fed hawks have long contended that financial stability risks call for further rate hikes to tamp down dangerous risk-taking.
Stopping after just one or two more rate hikes, when rates would be at most between 2.5 percent and 2.75 percent, would make the Fed's job harder by giving it less leeway to cut rates to offset any future downturn.
And with unemployment at 3.7 percent, some economists think, upward pressure on inflation is only a matter of time.
"We continue to think the Fed’s got more work to do," JPMorgan Chase & Co economist Michael Feroli said in a note on Friday.
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