Jerome Powell, chairman of the U.S. Federal Reserve, takes the oath of office in Washington, D.C. (Photographer: Andrew Harrer/Bloomberg)

Powell Enters Era of Rate-Hike Caution as Growth Headwinds Mount

(Bloomberg) -- Federal Reserve Chairman Jerome Powell suggested he’ll be more cautious about raising interest rates next year, disappointing investors who wanted even more dovishness.

“There’s significant uncertainty about both the path and the ultimate destination of any further rate increases,’’ he told a press conference Wednesday after the U.S. central bank bumped its target range for rates up by a quarter percentage point to 2.25 percent to 2.5 percent.

Powell Enters Era of Rate-Hike Caution as Growth Headwinds Mount

Investors gave Powell and the Fed the thumbs down, with the worst stock market decline for any Federal Open Market Committee announcement day since 2011. The selling gathered pace in Asia, with Japanese equities sliding into a bear market.

Some analysts attributed the global sell-off to disappointment that the Federal Open Market Committee hadn’t signaled that it was finished raising rates after its fourth increase this year, which defied President Trump’s calls for steady rates.

Powell Enters Era of Rate-Hike Caution as Growth Headwinds Mount

“The FOMC is a lot more dovish today than it was in September -- maybe not as dovish as the market would have liked, but the U.S. data don’t support the Fed throwing in the towel yet,’’ said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and a former Fed economist.

Policy makers scaled back the number of rate increases they expect next year to two, from three in September, according to their median forecast. That’s still more than investors expect: Traders in interest-rate futures are pricing in less than half of a quarter-point increase in 2019.

Powell also reaffirmed that the central bank will press ahead with its plan to reduce its $4.1 trillion in bond holdings. Some analysts had hoped that recent stock-market turbulence might convince the Fed to halt the program, which, like rate hikes, acts to tighten credit.

The Fed chief repeatedly called the outlook for next year “positive,’’ though policy makers did slightly lower their forecast for growth in 2019 to 2.3 percent from 2.5 percent in September. The economy is expected to expand 3 percent this year, its best performance since before the financial crisis a decade ago.

Crosscurrents Emerging

Powell did see some downside risks to that encouraging outlook. “Some crosscurrents have emerged’’ since the Fed’s September meeting, he said. He cited moderating, but still solid, growth in the rest of the world and recent weakness in the financial markets.

There is “a mood of angst about growth going forward,’’ he added.

Wednesday’s quarter-point hike came after Trump assailed the Fed on Twitter for two straight days, urging it to hold rates steady in the most public assault on the central bank’s political independence in decades.

Answering questions from the media, Powell said political considerations play no role in Fed policy making.

“We’re going to do our jobs the way we’ve always done them,” he said when asked about White House pressure. The Fed will do its analysis and “nothing will cause us to deviate from that,” he added.

The FOMC vote was unanimous, with all four of the Fed governors appointed by Trump -- including Powell -- backing the move.

The latest rate increase lifted the Fed’s rate target to the bottom of the 2.5 percent to 3.5 percent range that policy makers reckon is neutral for the economy -- neither spurring nor restricting growth. “Policy at this point does not need to be accommodative,’’ Powell said.

He shied away, though, from saying whether the Fed eventually would have to boost rates into restrictive territory to slow down the economy and prevent it from overheating.

What Our Economists Say 

“As the Fed approaches a neutral policy stance, the downshift in the dots should be viewed as a sign of caution, not a dovish signal. The Fed is nearing an extended pause; while the interest-rate cycle might be coming to an end, the economic cycle is not.”

-- Yelena Shulyatyeva, Tim Mahedy and Carl Riccadonna, Bloomberg Economics

Investors fear that the Fed will overdo it and push rates too high, significantly hurting growth in the process.

The plunge in government bond yields “is telling you that the bond market still sees further tightening weakening the outlook for the economy,’’ said Michael Gapen, chief U.S. economist at Barclays Capital Inc.

Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said in a note to clients that Powell had a difficult job due to “a massive divergence’’ between financial market fears of a crumbling global economic outlook versus “still mostly upbeat forecasts.’’

“The job of the FOMC today was to avoid appearing ignorant or aloof to the markets’ concerns without responding in a panicked way that would be the monetary policy equivalent of yelling ‘Fire!’ in a crowded theater,’’ he said.

“Today’s messaging from the FOMC is about as good as it could do to thread that needle,’’ he added.

©2018 Bloomberg L.P.