Fed defies Trump to hike key rate again

Responding to tweets Federal Reserve chairman Jerome Powell

Responding to tweets Federal Reserve chairman Jerome Powell

Jerome Powell sounded a note of humility Wednesday.

The central bank lifted rates for the fourth time this year on Wednesday, citing the U.S. economy's continued strong performance.

The outlook for Europe, Japan and China is considerably more uncertain than the prospects for the US. And markets hate uncertainty.

"I'm aware of no plans to fire Powell", Sanders told CNBC broadcaster. In my opinion, by proceeding with yesterday's rate hike and suggesting that two more are on the way for 2019, the odds that there will be no rate hikes in 2019 have increased.

His words, delivered in the chairman's characteristic calm baritone, were meant to be reassuring. Before the central bank's policy meeting earlier this week, Trump warned against lifting rates when stock markets were slumping.

Interestingly, the 10-year Treasury bond yield fell, signaling that the Bond Vigilantes are leaving it to the Dow Vigilantes to punish the Fed for its Grinch-like decision.

The Dow Jones industrial average lost 415 points, or 1.8 per cent, and closed at 22,443. For that reason, the central banks' median expectation for next year's rate hikes is still well above the markets', and policymakers remain comfortable with the notion that they could slightly overshoot the neutral rate estimate in 2020. Surprises were rare. Yet that policy is less viable for Powell than it was for his predecessor, Janet Yellen, who presided over a series of rate increases from a record low in 2015.

The still-strong performance followed a sizzling 4.2 percent advance in the second quarter and a moderate 2.2 percent increase in the first quarter. Wednesday's was the Fed's ninth hike since it began gradually tightening credit three years ago. Powell said he would continue to reduce the balance sheet. "We're like a small boat going through big waves". That's the point at which its key rate is thought to neither stimulate nor hinder growth.

And Powell is acknowledging that forecasting rate hikes has become tougher in this environment.

"There's an old joke: the beatings will continue until morale improves", said Keith DeGreen, chief executive officer at DeGreen Capital Management LLC in Scottsdale, Arizona.

Now the situation is reversed: A still-solid U.S. economy is not sufficient to dampen financial volatility and resist price declines in the context of structural market fragilities.

At prior meetings, Mr Powell has emphasised near record low unemployment rates as well as inflation, which is around the Fed's 2% target.

Still, Piegza predicts the economy will avoid a recession in 2019. "It would be construed as a loss of the Fed's independence, and the dollar would sell off along with stocks". A notably weaker economic outlook in those regions significantly undermines a policy normalisation process that has become more urgent due not only to declining effectiveness but also operational limitations (for example, the European Central Bank running out of bonds to buy) and unintended consequences.

The price of oil has also fallen sharply in recent weeks, down 40 percent from the high it reached in October, amid concerns over a glut in the market and the slowing economy. But Trump has renewed the issue after the Fed again raised its benchmark interest rate this week.

Investors have had a more pessimistic view than the Fed, foreseeing one increase at most in 2019, according to interest- rate futures prices.

Powell has met with Sherrod Brown - the ranking Democrat on the Senate Banking Committee, which oversees the Fed - five times. But it also raises the risk that the Fed will jolt the markets by catching them off guard. On the other hand, managed well, the news conferences could provide a valuable tool for Powell to shape how investors interpret the Fed's policies.

Investors had been hoping the Fed and Chairman Jerome Powell would be explicitly dovish in their communications but were left disappointed by the central bank's tone.

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