Published: Sat, February 02, 2019
Business | By Pearl Harrison

The Federal Reserve Calls Uncle On Higher Rates And More - Mike Swanson

The Federal Reserve Calls Uncle On Higher Rates And More - Mike Swanson

Recall that fears of an overly aggressive Federal Reserve helped send markets plummeting in November and December. Treasury yields were lower, meanwhile, and the dollar fell against a basket of peers.

Stock-index futures pointed to a mixed start for Wall Street on Thursday.

This time, it is widely anticipated and nearly 100% guaranteed that the FED will keep interest rates unchanged at 2.50%. The FOMC dropped its pledge of "further gradual" rate hikes.

"I think that was something that me and many others were anxious about as there was talk of an even longer shutdown", said Powell, who endorsed Congress pursuing policies that would avert another episode in the future.

"Our baseline forecast calls for one interest-rate increase later this year, likely in September". But in comments following the Fed meeting, Powell signaled a significant reversal. "So I think we are somewhere between one and two rate hikes that are being priced into the markets", he added.

Stocks have benefited this week from the U.S. Federal Reserve, which all but abandoned plans for further rate hikes, and on optimism that a U.S.

"The FOMC still thinks the economy is strong". On July 19, 2018, Trump told CNBC, "I don't like all of this work that we're putting into the economy and then I see rates going up".

Conspicuously absent from the Fed's statement was language about future rate hikes.

On the balance sheetsource June 2: The Eccles Building, location of the Board of Governors of the Federal Reserve System and of the Federal Open Market Committee, June 2, 2016 in Washington, DC.

The statement that accompanied it was created to assure investors that the Fed would make decisions based on the data and not rush ahead with any more hikes. These are different decisions and tools.

Did the Fed abruptly turn dovish because it knows that the global economy, particularly China's, is in much worse shape than is widely realized? "A distant second is the balance sheet".

Last year, Powell attracted considerable financial market criticism when he said the Fed's policy of reducing its holdings by $50 billion per month was on "auto pilot". "Overall, this was a positive message from the Fed as the ability to be nimble and make changes to monetary policy during periods of high uncertainty are extremely important".

Powell's extraordinary statement again reaffirmed the Fed's independence from presidential control.

"The lack of inflationary pressures is a key takeaway". Business spending already held down U.S. GDP growth past year, figures from the third-quarter show.

Noting the Fed's new mantra of patience, JP Morgan economist Michael Feroli summed up the implications of the booming jobs market in this way: "It just doesn't matter". "Most importantly, we would need to see inflation pick up and financial conditions ease with a resolution on some of the global downside risks".

"I am recovering from monetary-policy whiplash", Omair Sharif, an economist at Societe Generale, wrote. "However, with a stock market, and other markets, so clearly dependent on cheap money, the Fed has boxed itself into a corner".

That message is a marked departure from what the Fed was signalling just a few short months ago and could spell trouble further down the track for the United States economy. In the past couple of economic cycles, when the unemployment rate fell to the sort of level it is now, a recession followed not long after the Fed's last rate hike.

The Australian dollar was steady at US$0.7266.

Some, however, are lowering expectations for 2019. "We also believe Treasury prices will become increasingly sensitive if equity prices go down, but less sensitive if equity prices go up".

Market watchers were surprised by the Fed's latest signals on its balance-sheet unwind, which suggests the central bank is closer to completion than previously expected.

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