As Fed rethinks path for rates, gold poised to rally in 2019

As Fed rethinks path for rates, gold poised to rally in 2019

Federal Reserve Chairman Jerome Powell opened the door for a potential pullback in projected interest-rate hikes for 2019 following a widely expected increase in December.

"Powell took pains to state that the FOMC's rate projections are based on their best assessments of the economic outlook", Kevin Logan, chief USA economist for HSBC wrote in a Wednesday note to clients, referring to the policy-setting Federal Open Market Committee.

Some policymakers agreed with the idea of further rate increases, but also "expressed uncertainty about the timing". The next Fed meeting is December 18-19.

"If people get a sense that unemployment's going up, heaven forbid, we're going to see great volatility in 2019", Weston said by phone on November 29.

Powell, in remarks just two weeks ago, had listed three possible challenges to growth in 2019: slowing demand overseas, fading fiscal stimulus at home and the lagged economic impact of the Fed's past rate increases.

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY. Many investors read the remarks as signalling the Fed's three-year tightening cycle was drawing to a close.

The possible policy shift occurred at a meeting at which the Fed also resumed debate on how best to manage short-term interest rates in the future, a decision that could influence the final target size of the Fed's still-massive balance sheet.

"The messaging from the US over the last four weeks has been characteristically erratic", said David Page, senior economist at AXA Investment Managers.

Traders believe the risk of fast-rising interest rates hurting the USA economy and the stock market was now on the downside after Powell said monetary policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy economy.

"There is a lot of data to come between now and March, the most likely next opportunity for a rate hike".

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. At some point rates will cross into a neutral zone for the economy and then, if the Fed keeps pushing them up, they will become restrictive, slowing growth.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy. But that approach is no longer appropriate, Powell said.

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy. "I think that's what we've been doing".

Higher interest rates tend to slow economic growth over time as well as pressure stock prices according to Powell. Three of those increases have been under Powell. The current system relies on the Fed paying interest on some reserves to set the federal funds rate.

On Wednesday, Jerome Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view the Fed will have to be especially responsive to the data. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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