Fed minutes: Further hike "warranted soon", debate opened on pause

A US five dollar note is seen in this illustration

A US five dollar note is seen in this illustration

Federal Reserve chairman Jerome Powell has opened the door for a potential pullback in projected U.S. interest rate hikes for 2019 following a widely expected increase in December.

While markets still expect a rate hike in December, Mr Powell said, "there is no preset policy path".

Speaking at the Economic Club of NY on November 28, Jerome Powell outlined the Fed's decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation's financial stability. That contrasted with a remark Powell made in October that the Fed's policy rate was still well below neutral.

This month, Powell and other Fed policymakers have tried to dispel any perception of hawkishness.

"Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook", the minutes said.

Traditionally, stock markets love lower interest rates.

"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", Powell said.

Within just eight weeks, according to the Fed chairman, the central bank's base rate had gone from a "long way from neutral" to "just below" that level.

This gap, which measures expectations on rate increases in the next year, has narrowed to 23 basis points, indicating that traders are not penciling in more than one increase in 2019, although the Fed's median projections still point to three increases next year.

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.

The Fed has settled into a quarterly rate-hike cycle and is still expected to raise rates again next month, in what would be the fourth hike this year. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates".

Analysts think a rate hike next month is all but certain, possibly in part because they think the Fed doesn't want to appear to be bowing to pressure from Trump.

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.

"Many baby boomers like me are, however, reaching an age where a good report is, 'Well, there are a number of things we should keep an eye on, but all things considered you are in good health, '" said Powell. He said the Fed's policy of gradually raising rates was an exercise in balancing the risks between too rapid increases that would shorten economic expansion and keeping interest rates too low, which could boost inflation and create financial imbalances. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 percent annual price increases.

Powell noted the word "bubble" wasn't mentioned in the report, though he said some asset prices, such as corporate debt, were high relative to the past.

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