Trump can rail against Powell, but he can't fire him

Marcus Newton
December 1, 2018

The Fed has raised its benchmark short-term rate, now in a range of 2 percent to 2.25 percent, three times this year and is expected to do so again next month.

The minutes showed nearly all Fed members agreeing that another rate increase was "likely to be warranted fairly soon", but also ticked off a series of issues that had begun weighing on their view of the economy.

With estimates of a "neutral" rate in the range of 2.5-3.5 percent, the Fed is "only one hike away from the bottom end of the range but it remains three hikes from the middle of the range", Shepherdson said in a research note.

While campaigning for president in 2016, Trump had been critical of the Yellen Fed, contending that under her, the central bank was keeping rates abnormally low to try to help Democrats.

His remark then had unsettled investors, who feared it signalled that the Fed would continue raising rates well into the coming months. But signs of a slowdown overseas and almost two months of market volatility - including another sharp selloff last week - have clouded an otherwise mostly rosy USA picture in which the economy is growing well above potential and unemployment is the lowest since the 1960s.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said in a speech that comes in the wake of last week's volatile market sell-off.

Markets have been jittery in the lead up to a critical meeting on Saturday between Trump and his Chinese counterpart, Xi Jinping, at the G20 summit in Buenos Aires.

"Neutral" means the rate neither stimulates nor drags on economic growth. "We saw a good lift up in gold price close to the highs we've seen over the past few weeks", said Jonathan Butler, analyst at MUFG Investor Services.

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That's clearest in Eurodollar futures, which reflect the market's expectation for the three-month Libor (the London interbank offered rate, a key money-market benchmark).

The need for "further gradual rate increases" as appropriate to keep the current recovery on track has been a staple of recent Fed policy statements as the central bank nudged rates back toward more normal levels after a decade near zero. The law creating the Fed says such officials can be "removed for cause".

"It's important to distinguish between financial market volatility and events that threaten financial stability", he said.

"We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note.

"I'm doing deals, and I'm not being accommodated by the Fed", he said in an interview with the Washington Post.

Higher interest rates tend to slow economic growth over time as well as pressure stock prices.

Some market analysts treated such remarks as an indication of a possible pause in rate hikes, since the neutral rate could be used to decide a target area for the central bank to complete its normalization cycle.

Other reports by MaliBehiribAe

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