Fed nods to concerns but still sees U.S. rate hikes

(Reuters) – Federal Reserve policymakers on Friday signaled further interest rate increases ahead, even as they raised relatively muted concerns over a potential global slowdown that has markets betting heavily that the rate-hike cycle will soon peter out.

The widening chasm between market expectations and the interest-rate path the Fed laid out just two months ago underscores the biggest question facing U.S. central bankers: How much weight to give a growing number of potential red flags, even as robust U.S. economic growth continues to push down unemployment and create jobs?

“We are at a point now where we really need to be especially data dependent,” Richard Clarida, the Fed’s newly appointed vice chair, said in a CNBC interview. “I think certainly where the economy is today, and the Fed’s projection of where it’s going, that being at neutral would make sense,” he added, defining “neutral” as the policy rate somewhere between 2.5 percent and 3.5 percent.

Such a range implies anywhere from two to six more rate hikes, and Clarida declined to say how many he would prefer.

He did say he is optimistic that U.S. productivity is rising, a view that suggests he would not see faster economic or wage growth as necessarily feeding into higher inflation or, necessarily, requiring tighter policy. But he also sounded a mild warning.

“There is some evidence of global slowing,” Clarida said. “That’s something that is going to be relevant as I think about the outlook for the U.S. economy, because it impacts big parts of the economy through trade and through capital markets and the like.”

Federal Reserve Bank of Dallas President Robert Kaplan, in a separate interview with Fox Business, also said he is seeing a growth slowdown in Europe and China.

“It’s my own judgment that global growth is going to be a little bit of a headwind, and it may spill over to the United States,” Kaplan said.

The Fed raised interest rates three times this year and is expected to raise its target again next month, to a range of 2.25 percent to 2.5 percent. As of September, Fed policymakers expected to need to increase rates three more times next year, a view they will update next month.

Over the last week, betting in contracts tied to the Fed’s policy suggests that even two rate hikes might be a stretch. The yield on fed fund futures maturing in January 2020, seen by some as an end-point for the Fed’s current rate-hike cycle, dropped sharply to just 2.76 percent over six trading days.

At the same time, long-term inflation expectations have been dropping quickly as well. The so-called breakeven inflation rate on Treasury Inflation Protected Securities, or TIPS, has fallen sharply in the last month. The breakeven rate on five-year TIPS US5YTIP=RR hit the lowest since late 2017 earlier this week.

Those market moves together suggest traders are taking the prospect of a slowdown seriously, limiting how far the Fed will end up raising rates.

In an interview with the Wall Street Journal, Philadelphia Fed chief Patrick Harker also sounded a skeptical note.

“At this point I’m not convinced a December rate move is the right move,” he was quoted as saying, citing muted inflation readings.

But not all policymakers seemed that worried.

Sitting with his back to a map of the world in a ballroom in Chicago’s Waldorf Astoria Hotel, Chicago Fed President Charles Evans downplayed risks to his outlook, noting that the leveraged loans that some of his colleagues have raised concerns about are being taken out by “big boys and girls” who understand the risks.

He told reporters he still believes rates should rise to about 3.25 percent so as to mildly restrain growth and bring unemployment, now at 3.7 percent, back up to a more sustainable level.

Asked about risks from the global slowdown, he said he hears more talk about it but that it is not really in the numbers yet. But the next six months, he said, bear close watching.

“There’s not a great headline” about risks to the economy right now, Evans told reporters. “International is a little slower; Brexit – nobody’s asked me about that, thank you; (the slowing) housing market: I think all of those are in the mix for uncertainties that everybody’s facing,” he said.

“But at the moment, it’s not enough to upset or adjust the trajectory that I have in mind.”

Still, Evans added, the risks should not be counted out: “They could take on more life more easily because they are sort of more top of mind, if not in the forecast.”

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Fed's Powell: U.S. 'really strong' even with housing, other risks to watch

DALLAS (Reuters) – A “really strong” U.S. economy is likely to continue growing, but softness in housing and high levels of corporate debt have caught the Federal Reserve’s eye, Chairman Jerome Powell said on Wednesday.

Powell, quizzed by Dallas Federal Reserve President Robert Kaplan in an hour-long conversation, was not asked directly about possible further rate increases, but said nothing to counter the expectation that the Fed will raise rates again when it meets in December.

However he did enumerate a set of concerns that have begun to arise among Fed officials as they debate how much further and how fast to raise their short-term policy rate, a benchmark for other borrowing costs in the economy.

“Slowing growth abroad. The tax cuts and spending increases that were enacted are providing some real boost right now, but that impetus is going to wear off over time,” Powell said when asked to list the “headwinds” the economy may face in coming months.

Earlier in the session he pointed to recent weakness in housing as a concern. And while he said he regarded financial risks overall as “pretty moderate,” with neither banks nor households heavily leveraged, he said corporate borrowing had caught the Fed’s attention.

“There are a lot of factors weighing on home building right now. Material costs, labor scarcity … It is rates as well,” with the costs of home mortgages rising, Powell said. While leverage and other credit indicators are healthy overall, “there is some significant corporate borrowing and we have our eyes on that.”

The Fed raised rates at its September meeting, and Powell at the time mapped out an optimistic view of unemployment likely to continue at record low levels, growth continuing, and inflation near the central bank’s 2 percent target.

His commentary following that meeting was exuberant, saying in an early October public session that the economy was “extraordinary.”

Over the weeks that followed equity markets were pummeled in a sharp sell-off that renewed this week, the latest figures on gross domestic showed a slowing in business investment, and global data showed world growth possibly beginning to ebb.

That did not alter the Fed’s outlook much, and policymakers at their meeting last week said economic growth continued “at a strong rate.”

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However in recent weeks policymakers have also acknowledged that this year could mark a plateau of sorts, with the Fed forced next year to balance the impact of ultra-low unemployment on inflation, while also dealing with a possible slowdown in growth.

Like many of his colleagues, Powell hinted that the boost that the economy has gotten from various federal policies could soon begin to wane.

“That impetus is going to wear off over time,” Powell said. “That could be happening in the next year or so.”

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Fed's Powell says press conference at every meeting means all sessions are 'live'

DALLAS (Reuters) – Federal Reserve Chair Jerome Powell said that the introduction of press conferences after every Fed meeting next year means all meetings are now “live” for possible rate increases.

“The market is going to have to get used to that,” Powell said of the fact that the Fed may now raise rates at any of its eight regular policy meetings, and not just the four at which it had been holding press conferences in the past.

The U.S. central bank, which has a 2 percent inflation target, left interest rates unchanged last Thursday after a two-day policy meeting. The Fed is widely expected to raise interest rates at its December meeting.

More news conferences by the Fed chair is an extension of years of increasing transparency at the Fed, which decades ago didn’t even issue a statement to describe its rate decision but relied instead on traders inferring it from the central bank’s activities in open markets.

In 1994, the Fed released its first post-meeting statement. It was less than 100 words. Over the years the statement ballooned until it reached a post-crisis zenith of more than 900 words.

(For a graphic showing how the Fed has communicated through the years, please see tmsnrt.rs/2QpUvcR)

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Fed's Powell says press conference at every meeting means all sessions are 'live'

DALLAS (Reuters) – Federal Reserve Chair Jerome Powell said that the introduction of press conferences after every Fed meeting next year means all meetings are now “live” for possible rate increases.

“The market is going to have to get used to that,” Powell said of the fact that the Fed may now raise rates at any of its eight regular policy meetings, and not just the four at which it had been holding press conferences in the past.

The U.S. central bank, which has a 2 percent inflation target, left interest rates unchanged last Thursday after a two-day policy meeting. The Fed is widely expected to raise interest rates at its December meeting.

More news conferences by the Fed chair is an extension of years of increasing transparency at the Fed, which decades ago didn’t even issue a statement to describe its rate decision but relied instead on traders inferring it from the central bank’s activities in open markets.

In 1994, the Fed released its first post-meeting statement. It was less than 100 words. Over the years the statement ballooned until it reached a post-crisis zenith of more than 900 words.

(For a graphic showing how the Fed has communicated through the years, please see tmsnrt.rs/2QpUvcR)

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Fed's Daly wants gradual rate hikes, says Fed not on autopilot

IDAHO FALLS, Idaho (Reuters) – With the U.S. economy at or beyond full employment and inflation likely to rise slightly above a 2 percent goal over the next year, the Federal Reserve should continue to raise rates gradually, its newest policymaker said Monday.

“I view this gradualism as a process of iterated learning, guided by incoming data,” San Francisco Federal Reserve Bank president Mary Daly said in her first public remarks since taking her new job last month. “That is, we take a policy action, wait, learn about the economy’s response, and repeat. The information gathered through this gradual approach is crucial for determining the speed and size of the subsequent policy adjustments.”

That view puts Daly, who has a vote on the Fed’s monetary policy committee this year, squarely in the center of the policy spectrum at the U.S. central bank. The Fed has been raising interest rates by a quarter of a percentage point each quarter all year and is expected to do so again when it meets next month.

The gradual rate increases are not expected to start slowing the current economic expansion, which Daly said Monday seems “destined” to become the longest period without a recession in U.S. history, until sometime next year, most policymakers believe.

As of September, when they last released public forecasts, U.S. central bankers expect to continue to raise rates next year.

Daly said that pace will depend on how the economy, fueled currently by tax cuts and government spending domestically and global growth internationally, fares.

“The (Fed) is not on autopilot, with quarterly rate increases locked in,” Daly said in the remarks to a regional economic development group here. “We’re constantly looking at the data and adjusting the monetary policy path as needed in response.”

For now, she said, the U.S. economy is “very good,” with a booming labor market — unemployment is at 3.7 percent nationally — and an inflation outlook that is “very encouraging.” Still, she said, some people remain on the sidelines, and much could still be done to boost both educational attainment and labor force participation.

In particular, she suggested, the U.S. may be idling much of its female workforce because of weak parental leave laws. Citing a study that is expected to be released on Tuesday, Daly noted that Canadian women participate in the workforce at much higher rates than their U.S. counterparts.

“I’m not advocating we adopt the Canadian system or recommending any particular policy,” said Daly, a longtime student of gender and race in the labor economy. “But the comparison with Canada, as well as with other industrialized nations, shows that policy matters and that, with the right mix of skills and support, there’s meaningful potential for increasing U.S. workforce participation.”

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U.S. Fed to reconsider 'stress capital buffer' plan: official

WASHINGTON (Reuters) – Randal Quarles, head of supervision at the Federal Reserve, said on Friday the central bank would re-propose aspects of a bank capital rule known as the “stress capital buffer” due to industry concerns.

Speaking at a conference in Washington, Quarles said the regulator should also ease a key element of its annual stress tests that allows the regulator to fail firms on operational grounds.

The changes are part of a broader Fed effort to streamline its stress-testing process, a tool introduced after the 2007-2009 financial crisis that banks say has become far too onerous.

The Fed proposed a “stress capital buffer” (SCB) in April, an effort to shift the Fed’s stress testing regime to fall more in line with its traditional supervisory work, and make its requirements more flexible to address each firm’s specific characteristics.

But in response to industry comments, Quarles said the Fed would rethink several portions of the plan to make it simpler for banks.

The changes under consideration are aimed at making the future supervisory and capital regime for banks simpler and more predictable.

He pitched a number of significant changes to how the Fed evaluates the strength of a bank’s operations during times of crisis. He said the Fed is considering a change that would allow a bank to learn how it fared under the Fed’s evaluation before building a capital distribution plan. This would reverse the current regime where banks must pitch capital plans to the Fed for approval, which has been a point of stress for banks given the public nature of the approval or rejection.

He also said the Fed was considering scrapping leverage requirements proposed as part of the stress capital buffer, and was working to reduce the volatility of stress test results now that banks have built up significant capital reserves following the financial crisis.

On current stress tests, Quarles said he supported eliminating the Fed’s ability to object to a bank’s plan on “qualitative” grounds. Banks had long complained that this standard, which gave the Fed broad leeway to flunk banks for operational concerns even if their capital proved sufficient, was opaque and arbitrary.

In June, German lender Deutsche Bank (DBKGn.DE) fell foul of the qualitative standard due to “widespread and critical deficiencies” in its capital planning controls.

Banks have started to complain increasingly about the Fed’s stress tests, saying the scenarios have become unrealistically severe and are proving an unnecessary drag on their capital. Morgan Stanley (MS.N) chief executive James Gorman said in October that it had been pushing the Fed to reconsider its approach to the tests.

Quarles said the Fed was considering giving banks more insight into its stress testing model and scenarios. The Fed had resisted giving too much information on that front in the past, concerned that banks could find ways to pass the test without actually reducing risk. But Quarles argued close examination of banks by Fed supervisors could guard against that.

“I’ve always been a little skeptical of that, about the ability of the firms to game it,” he said.

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Fed leaves rates unchanged, says U.S. economy strong

WASHINGTON (Reuters) – The U.S. Federal Reserve held interest rates steady on Thursday but remained on track to keep gradually tightening borrowing costs, as it pointed to a healthy economy that was marred only by a dip in the growth of business investment.

Business investment can be a key to rising productivity and future growth, and the fact that it had “moderated from its rapid pace,” as the Fed said, was the only cautionary note in a policy statement that touted strong job gains and household spending, and a “strong rate” of overall economic activity.

“The labor market has continued to strengthen and … economic activity has been rising at a strong rate,” the U.S. central bank said, leaving intact its plans to continue raising rates at a gradual pace. The Fed has hiked rates three times this year and is widely expected to do so again in December.

The statement overall reflected little change in the Fed’s outlook for the economy since its last policy meeting in September. Inflation remained near its 2 percent target, unemployment fell, and risks to the economic outlook were still felt to be “roughly balanced.”

Policymakers, however, took particular note of the moderation in business investment, an important component of GDP that can spin off jobs as companies build new facilities, and raise productivity as they upgrade equipment and processes.

Boosting investment was one of the main objectives behind the Trump administration’s move to reduce the corporate tax rate as part of its restructuring of the tax code at the end of 2017.

After adding four-tenths of a percentage point to economic growth in the first six months of the year, lagging investment in “nonresidential structures” trimmed a quarter of a percentage point in the annualized growth rate for the third quarter.

Financial markets, which had expected the Fed to hold its benchmark overnight lending rate steady in the current range of 2.00 percent to 2.25 percent this week, ticked lower after the statement was released.

After a stock market rout in October and signs that both housing and business investment may be waning, some analysts expected the Fed to possibly signal doubt about its next rate increase.

Yet December still seems firmly in play.

“The only surprise here is that they weren’t more hawkish,” said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York. “There were a couple words that were more muted – that business investment had ‘moderated’ from its earlier pace. But apart from that they have not signaled any warning signs at all.”

U.S. stocks, which had rallied broadly on Wednesday after the results of the U.S. congressional elections, turned lower as the Fed’s statement offered no indication the central bank might slow the pace of its rate increases.

The dollar also weakened against the euro and yen and U.S. Treasury yields held near the day’s high. The 10-year Treasury note yield, a benchmark for both consumer and business borrowing costs, was 3.23 percent, around the highest since 2011.

FADING STIMULUS

Data released in late October showed the U.S. economy grew at a 3.5 percent annual rate in the third quarter, well above the roughly 2 percent annual growth pace the Fed and many economists regard as the underlying trend.

But Fed policymakers also have begun debating whether the economy has reached a plateau as the stimulus from the Trump administration’s $1.5 trillion tax cut package and increased federal spending begin to fade.

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The Fed’s policy statement did not explicitly take stock of the recent volatility in U.S. equity markets that led to the selloff in October, or address the possibility of a slowdown in global growth next year.

There were no updated economic forecasts released on Thursday and Fed Chairman Jerome Powell was not scheduled to hold a news conference.

The Fed’s policy decision was unanimous.

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