Fed says another rate hike is expected 'fairly soon'

Was Post Fed Chair Speech Rally a Market Overreaction

Tucked in his speech, Powell said that rates are "just below" the so-called neutral range, the level that central bankers believe will neither accelerate nor slow economic growth - a subtle two-word shift from comments he made in October suggesting that interest rates are still "a long way" from neutral. Investors interpreted his remarks as evidence that the Fed might consider pulling back from quarterly rate hikes.

The New York stock market rallied on the news. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates".

Wednesday's remarks sent stocks soaring and moved at least one analyst, Gregory Daco at Oxford Economics, to expect two instead of three rate hikes next year, as the Fed steers the economy toward a "soft landing" where it could keep growing at a slower clip without stoking inflation. That comment had unsettled investors who feared that it meant the Fed would need a number of further hikes to get to neutral.

With the Federal Reserve expected next month to raise rates to what some US central bankers believe is at or near a neutral level, Chairman Jerome Powell is retuning his message to signal a more cautious approach on further rate hikes next year. Powell, who took over as Fed chairman in February, has said he wants to provide the public with "plain English" descriptions of what the central bank is up to.

Powell also underscored the importance he places on communicating the Fed's thinking in a way that people will understand.

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Powell in his remarks Wednesday also raised the importance of policymakers staying flexible in charting a path of policy given that the effects of rate hikes show up with a lag - a point that was reinforced in the Fed's November minutes.

Powell was cited in the minutes as saying that "it might be appropriate to implement another technical adjustment in the IOER rate relative to the top of the target range for the federal funds rate fairly soon".

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

"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce".

But other participants preferred a wait-and-see approach, noting that the future held "upside" and "downside" risks, such as slowing global growth on one hand and faster inflation on the other.

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Part of Powell's caution reflects inherent uncertainty over how the economy responds to interest rate increases.

But policymakers may be divided over what to do after that, with some anxious raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said. The benchmark rate, now at 2.00-2.25 percent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 percent.

The Fed is poised to raise rates again at its next policy meeting in mid-December and to continue raising rates next year, according to the minutes of the Fed's most recent meeting released on Thursday.

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