US Federal Reserve Chairman Jerome Powell on Wednesday suggested that he would be more cautious about raising interest rates next year, disappointing investors who wanted even more dovishness.
“There’s significant uncertainty about both the path and the ultimate destination of any further rate increases,’’ he told a news conference after the bank bumped its target range for rates up by 0.25 percentage points, to 2.25 to 2.5 percent.
Investors gave Powell and the Fed the thumbs down, with the worst stock market decline for any Federal Open Market Committee (FOMC) announcement day since 2011. The selling gathered pace in Asia, with Japanese equities sliding into a bear market.
Some analysts attributed the global sell-off to disappointment that the committee had not signaled that it was finished raising rates after its fourth increase this year, which defied US President Donald Trump’s calls for steady rates.
“The FOMC is a lot more dovish today than it was in September — maybe not as dovish as the market would have liked, but the US data don’t support the Fed throwing in the towel yet,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and a former Fed economist.
Policymakers scaled back the number of rate increases that they expect next year to two, from three in September, their median forecast showed.
That is still more than investors expect: Traders in interest-rate futures are pricing in less than half of a 0.25 percentage point increase next year.
Powell also reaffirmed that the central bank would press ahead with its plan to reduce its US$4.1 trillion in bond holdings. Some analysts had hoped that recent stock market turbulence might convince the Fed to halt the program, which, like rate hikes, acts to tighten credit.
Powell repeatedly called the outlook for next year “positive,” although the policymakers slightly lowered their forecast for growth next year to 2.3 percent, from 2.5 percent in September.
The US’ economy is expected to expand 3 percent this year, its best performance since before the financial crisis a decade ago.
However, Powell said he saw a number of downside risks to that encouraging outlook.
“Some crosscurrents have emerged” since the Fed’s September meeting, he said, citing moderating, but still solid, growth in the rest of the world and recent weakness in the financial markets.
There is “a mood of angst about growth going forward,” he added.
The hike came after Trump assailed the Fed on Twitter for two straight days, urging it to hold rates steady in the most public assault on the central bank’s political independence in decades.
Answering questions from the media, Powell said that political considerations play no role in Fed policymaking.
“We’re going to do our jobs the way we’ve always done them,” he said when asked about White House pressure.
The Fed would do its analysis and “nothing will cause us to deviate from that,” he added.
The latest rate increase lifted the Fed’s rate target to the bottom of the 2.5 to 3.5 percent range that policymakers reckon is neutral for the economy — neither spurring nor restricting growth.
“Policy at this point does not need to be accommodative,’’ Powell told the news conference.
However, he shied away from saying whether the Fed would eventually have to boost rates into restrictive territory to slow down the economy and prevent it from overheating.
Investors fear that the Fed will overdo it and push rates too high, significantly hurting growth in the process.
The plunge in government bond yields “is telling you that the bond market still sees further tightening weakening the outlook for the economy,” Barclays Capital Inc chief US economist Michael Gapen said.
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