Jerome Powell, governor of the U.S. Federal Reserve, listens during a Senate Banking Committee hearing in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Fed Rate Pause Possible in 2019 as Powell Highlights Headwinds

(Bloomberg) -- Federal Reserve Chairman Jerome Powell has laid out a scenario for a pause in the central bank’s interest-rate hiking campaign sometime next year by highlighting potential headwinds to the U.S. economy.

While generally upbeat about the outlook, Powell on Wednesday listed three possible challenges to growth in 2019: slowing demand abroad, fading fiscal stimulus at home and the lagged economic impact of the Fed’s past rate increases.

“These are things we are well aware of,’’ he said in an appearance at the Dallas Fed.

The central bank is widely expected to raise rates for the fourth time this year in December -- and Powell did nothing to disabuse investors of that notion, playing down the significance of the recent stock market sell-off while playing up the performance of the economy.
But his comments about possible drags on growth in 2019 raise questions about how many times the Fed will boost rates next year. The median forecast of policy makers in September was for three increases of a quarter percentage point each in 2019.

That masks a divergence of views, with 12 of the policy makers evenly split among two, three or four hikes. Federal Open Market Committee members will update their rate and economic forecasts at their Dec. 18-19 meeting.

Morgan Stanley Chief U.S. Economist Ellen Zentner said she expects the FOMC to follow a December rate hike with two more increases next year, then hold policy steady. Behind that call: an expected slowdown in growth.

Zentner’s forecast is in line with what investors are expecting, based on trading in the federal funds futures market. That would leave the Fed’s funds rate target at 2.75 to 3 percent, near the level policy makers reckon is neutral for the economy, according to the September median forecast.

Fed Rate Pause Possible in 2019 as Powell Highlights Headwinds