Fed defends gradual approach to interest rate hikes

Regulator forecasts three more hikes in 2019

The US Federal Reserve. Investors are becoming sceptical about the median forecast of Fed officials in September for three additional hikes in 2019.

The US Federal Reserve. Investors are becoming sceptical about the median forecast of Fed officials in September for three additional hikes in 2019.

 

Federal Reserve vice chairman Richard Clarida said the central bank’s gradual approach to interest-rate hikes is appropriate as US monetary policy gets closer to its optimal longer-run setting.

“As the economy has moved to a neighbourhood consistent with the Fed’s dual-mandate objectives, risks have become more symmetric and less skewed to the downside than when the current rate cycle began three years ago,’’ Mr Clarida said at The Clearing House and Bank Policy Institute’s annual conference in New York on Tuesday.

Information

Gradual rate increases allow the Fed to “accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our two per cent objective,” he said.

Faced with a slowing global growth outlook, some softening in US housing and business investment, Fed officials are trying to communicate how incoming economic data will shape the path of monetary policy over the next year.

Fed chairman Jerome Powell is scheduled to speak in New York on Wednesday. In his remarks, Mr Clarida said the Fed is updating its estimates of the “uncertain” neutral policy rate and an unemployment rate consistent with stable prices “as new data arrive” .

Even so, rates are “much closer to the vicinity” of neutral than when the Fed started its rate-hiking cycle in December, 2015.

The Fed’s rate hikes have been predictable over the past year, coming once a quarter since December, 2017.

US central bankers will raise the benchmark lending rate for a fourth time this year when they meet December 18th-19th, according to futures markets that are pricing in about a 76 per cent probability of a quarter-point hike.

Growth

After that, however, investors are becoming sceptical about the median forecast of Fed officials in September for three additional hikes in 2019.

Mr Clarida’s speech indicated that incoming economic reports will be critical to the Fed’s pace for next year, which could be more challenging for growth. While the world’s largest economy is robust by most measures, some signs of slowing have emerged recently, including a weaker housing market and capital expenditures that bolstered growth earlier this year.

Orders at US factories for non-military capital goods, excluding aircraft, were weak in October for a third straight month. Mr Clarida, who joined the Fed in September, sounded a note of caution over a slowdown in the amount businesses invested in equipment and software in the third quarter.

“One data point does not make a trend, but an improvement in business investment will be important if the pickup in productivity growth that we have seen in recent quarters is to be sustained,” he said. – Bloomberg