With the Federal Reserve expected next month to raise rates to what some US central bankers believe is at or near a neutral level, Chairman Jerome Powell is retuning his message to signal a more cautious approach on further rate hikes next year.
"Powell took pains to state that the FOMC's rate projections are based on their best assessments of the economic outlook", Kevin Logan, chief U.S. economist for HSBC wrote in a Wednesday note to clients, referring to the policy-setting Federal Open Market Committee. And the headline unemployment rate drops further.
But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed.
"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said.
Jerome Powell's speech essentially said the economy is doing well, and asset prices are not in a bubble, but that rates are close to "neutral" although people dispute what that is, according to Nicholas Frappell, global general manager at Sydney-based ABC Bullion.
Traders work on the floor of the New York Stock Exchange in New York on November 28, 2018.
Fed officials appeared less concerned about a market selloff that led to a rotten October for stocks. "We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note.
It was a "rookie mistake, " Omair Sharif, senior USA economist at Societe Generale, said Wednesday in a note to clients.
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The Fed has raised rates three times this year and has been saying the economy is in strong shape. That suggested to many investors that fewer rate increases might be on the way.
On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a "long way" from a so-called neutral level and that the Fed might even tighten policy beyond that level.
USA stocks had enjoyed a strong rally on Wednesday after Powell said US interest rates were "just below" neutral, less than two months after saying rates were probably "a long way" from that point.
Markets are now trying to divine Powell's plans from data pulling in two directions - rising wages that could be a precursor to inflation, for example, compared to slowing growth and falling oil prices that may keep inflation down, or other indicators clouding the picture. His emphasis on Wednesday suggested greater flexibility to stop sooner or move more slowly.
"Our gradual pace of raising interest rates has been an exercise in balancing risks", Mr Powell said.
"The neutral rate is an absurd concept".
Minutes of the November meeting show policymakers ticking off a series of issues, including a tightening of financial conditions, global risks, "and some signs of slowing in interest-sensitive sectors", that had begun weighing on their view of the economy.
Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.