Fed leaves rates unchanged, notes slowing in business investment

Darnell Taylor
November 12, 2018

There was no mention of the volatility that has gripped financial markets since mid-October, when Fed Chairman Jerome Powell made remarks that Wall Street took as hawkish for the pace of future rate hikes. Its brief statement was almost identical to the one the Fed issued in September.

Fed officials worry low unemployment and higher wages could speed up inflation, forcing the central bank to raise rates more aggressively, and tip the economy into recession.

The brisk pace of economic growth - a 3.5 percent annual rate in the July-September quarter, after a 4.2 percent rate in the previous quarter - has raised the risk that inflation could begin accelerating.

However, the statement noted that the "growth of business fixed investment has moderated from its rapid pace earlier in the year".

Fed policymakers are set to gather in Washington on Wednesday and Thursday.

"Almost all Fed officials appear to be on board with gradual hikes towards the 'neutral rate", referring to the level that central bankers consider interest rates as neither accelerating nor halting economic growth, Jan Hatzius, chief U.S. economist for Goldman Sachs, wrote in a recent note to clients. Given how upbeat the Fed's assessment of the economy is, Wall Street thinks a December rate hike is nearly certain. Making that change, which is seen as unlikely, would be dovish and suggest the central bank is closer to the end of the rate cycle.

Financial markets have also experienced more volatility. The FOMC said it expects to continue gradually raising rates as the economy expands. Swonk is predicting four rate hikes next year - one more than the Fed is anticipating - because she believes inflation will be above the Fed's 2 percent target and the Fed will act swiftly to contain it. USA policy makers are also contending with a strengthening dollar as interest rates rise and more recent market volatility just as other central banks take steps to end crisis-era stimulus programs.

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The Fed's policy statement did not explicitly take stock of the recent volatility in USA equity markets that led to the selloff in October, or address the possibility of a slowdown in global growth next year. So far, though, inflation has remained around the Fed's 2 percent target for annual price increases.

Even Powell has cautioned that central bankers might have to "move a little bit quicker" if they see the economy getting "stronger and stronger" and "inflation moving up".

The Fed did not specify any risks to the economy it perceives.

One key question is the degree to which higher wages could lead businesses to raise prices.

For now, the Fed has sent strong signals it plans to stay the course.

The FOMC at its September meeting actually voted to remove the word "accommodative" from its description of the current policy path. Powell and others have said the word is no longer useful in describing how the Fed is proceeding. "The job of the Fed is to remain focused on the facts of the economy and to be independent of the administration".

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