US Fed official urges pause on rate hikes with inflation under control

Was Post Fed Chair Speech Rally a Market Overreaction

Was Post Fed Chair Speech Rally a Market Overreaction

At the September meeting, the Fed signaled that it would likely raise rates one more time this year, and it projected three more rate hikes in 2019.

But Fed officials also raised the prospect they could slow plans to raise rates next year, and discussed how to signal to investors that they would stay flexible "in responding to changing economic circumstances".

Chairman Jerome Powell's Wednesday speech to the Economic Club of NY was hardly as hawkish as some had expected.

Kashkari's remarks came after Fed Chairman Jerome Powell said on Wednesday that interest rates are "just below" the broad range of estimates of the level that would be neutral for the economy.

Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell meant to send a message or was simply misunderstood.

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.

With last year's deep tax cuts and fiscal stimulus from Congress, the world's largest economy continues to hum, producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed's two percent target.

"The messaging from the USA over the last four weeks has been characteristically erratic", said David Page, senior economist at AXA Investment Managers. "If US growth slows down next year, as expected, gold would benefit from higher demand", analysts including Jeffrey Currie said in a November 26 note that endorsed bullion as one of its top 10 trade ideas for commodities.

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Nearly all Fed officials at the meeting agreed another interest rate increase was "likely to be warranted fairly soon", but also opened debate on when to pause further hikes and how to relay those plans to the public.

Minutes of the November 7-8 meeting of the Fed's rate-setting body, the Federal Open Markets Committee, show that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.

"We also know that the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized", he said. "The market has already priced in 10 out of the 12 rate hikes that we expect".

"Fed policy makers appear to have made a decision to strike a somewhat more cautious tone as of late". Beyond the immediate focus of this weekend's Group of 20 summit - which may roil markets - there are other drivers that favour further gains in bullion including a steady build-up in exchange-traded fund holdings as well as votes of confidence from top banks.

"If you look down the road, you see challenges ahead, and they're challenges that are typical in a cycle", said Powell speaking earlier this month at the Federal Reserve Bank of Dallas.

"Westpac is forecasting rates will rise in December, and this will be followed by 3 further rate hikes in 2019". It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.

The current Federal Fund rate is 2.25 per cent, and there is a 77 per cent probability of a 25-basis point increase in the December meeting scheduled in the week before Christmas.

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