Fed chairman: U.S. economy healthy and rate hikes arent automatic

Image Tim Arbaev iStock

Image Tim Arbaev iStock

America's economy is still growing robustly, but a string of possible outside shocks including President Donald Trump's protracted trade rift with China could trigger a downturn, according to a report released by the Federal Reserve on Wednesday.

Minutes of the November meeting show policymakers ticking off a series of issues, including a tightening of financial conditions, global risks, "and some signs of slowing in interest-sensitive sectors", that had begun weighing on their view of the economy.

Still, Mr. Powell's observation appeared to soothe anxious investors.

The meeting comes at a pivotal moment in the trade war between the world's two largest economies.

Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates. Trump has threatened to launch a third round of tariffs on $267 billion in Chinese goods if he and Xi fail to end their impasse.

"There is no preset policy", he said.

His remark then had unsettled investors who feared it signaled that the Fed would continue raising rates well into the coming months.

The Dow surged on the news and closed up 600 points, or more than 2%, in midday trading.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.




Higher US interest rates tend to boost the dollar, making gold more expensive for holders of other currencies. On this count the market speaks loud and clear - Powell blinked and the Fed will be sensitive to market swings going forward. He has repeatedly bashed Powell, a Republican investment banker he appointed and described past year as a "wise steward".

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes.

Trump has complained that the Fed is threatening to undo the economic stimulus being provided by the tax cuts and that its rate hikes are unnecessary because inflation has remained relatively low.

Trump even added that sometimes decisions he makes with his "gut" matter more than what other people's brains tell him. This is probably because Fed Chair Jerome Powell stole most of the thunder the day before with his dovish remarks about the fate of future rate hikes.

"So, with a December rate hike and one or two more in 2019 that should be enough to put the Fed where they want to be". At the same time, Powell says the financial system and markets appear far sturdier than they did before the 2008 crisis.

In a speech that comes in the wake of another volatile market selloff, Powell offered few clues on how much longer the USA central bank would continue tightening policy but he did say the policy rate, at 2-2.25 percent, is now "just below" the broad range of estimates of neutral, which in September was 2.5-3.5 percent. Rather, we assume that Powell wanted to prepare the markets for a change in the central bank's communication.

Nor did the Fed and other major economic bodies see the "excesses" that led to the financial meltdown of 2008, instead claiming that the U.S. and world economy had entered a period of "great moderation". He said the Fed was "way off base with what they're doing".

The Fed chairman said the central bank is monitoring potential vulnerabilities in the banking system to ensure its continued stability.

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