The Fed’s No. 2 on Rate Hikes and Inflation

Alex Brandon  AP

President Donald Trump made a series of unusual comments about the Federal Reserve in an interview with the Washington Post on Tuesday, bashing his Fed Chair Jerome Powell and displaying a deep misunderstanding of the institution's strategy.

The Dow Jones Industrial Average surged more than 600 points, or 2.5%, to 25,366.43, while the broader S&P 500 index rose 2.28% to 2,743.43.

"Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook; such a change would help to convey the Committee's flexible approach in responding to changing economic circumstances".

Powell said in a speech Wednesday to the Economic Club of NY that the Fed is monitoring potential vulnerabilities in the banking system to ensure its continued stability.

The Fed members' comments initially appeared to comfort investors.

The U.S. central bank in 2018 has hiked rates each quarter, and is expected to tighten policy again next month. But the likely pace of rate increases next year remains a subject of speculation.

The fed fund futures contract expiring in January 2020, a heavily traded contract that reflects market expectations for where rates will be at the end of 2019, rallied sharply on record volume.

Those comments followed a series of public attacks on the chairman of the Fed, a position that, while appointed by the president, is supposed to enjoy political independence.

Trump has been more outspoken than his predecessors in criticizing the Fed.

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"We know that moving too fast would risk shortening the expansion", Mr. Powell said.

America's economy is still growing robustly, but a string of possible outside shocks including President Donald Trump's protracted trade rift with China could trigger a downturn, according to a report released by the Federal Reserve on Wednesday. The law creating the Fed says such officials can be "removed for cause". He added that the Fed regards no major asset class as significantly inflated, "as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom". The wording was already chosen so as not to further fuel market turmoil.

"I'm not dancing or partying right at the moment", he said, adding that the Fed has talked about gradual rate hikes "for a very long time". Why should he? The data for the U.S. economy remains strong.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

But Powell also noted a number of looming risks, including the slowdown in global growth and the fading economic benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed's own rate hikes.

This week, a speech by Jerome Powell, the chairman of the US Federal Reserve, triggered strong price swings in financial markets. "I think that was what really sparked the market to go higher".

As for future hikes, some expressed uncertainty about the timing.

"So, with a December rate hike and one or two more in 2019 that should be enough to put the Fed where they want to be".

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