Federal Reserve officials are seemingly on track to raise a key interest rate in December, but they showed more caution in their most recent meeting and indicated the pace of future hikes might need to slow given emerging risks to the economy.
The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the United States dim the appeal of risky assets.
Until now, strong economic data and new fiscal stimulus made the central bank more determined to gradually lift rates to neutral because the economy is expanding solidly and unemployment continues to fall.
The current Federal Fund rate is 2.25 per cent, and there is a 77 per cent probability of a 25-basis point increase in the December meeting scheduled in the week before Christmas.
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. Many investors read the remarks as signalling the Fed's three-year tightening cycle was drawing to a close. "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. With previous hikes in March, June, and September, one more rate hike this year would put 2018's rate of increases on par with 2006, the last year the Fed increased rates prior to the crash.
Almost two months ago, Powell had said that rates were far from neutral.
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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.
It is not clear whether the idea of perhaps nudging rates above neutral, as he had earlier suggested, is still on the table, or if it means he expects fewer rate hikes, or even a pause. Federal Reserve Chairman Jerome Powell ignited a market rally Wednesday by saying interest rates are "just below" broad estimates of a level considered neutral, a setting created to neither speed nor slow economic growth. His emphasis on Wednesday suggested greater flexibility to stop sooner or move more slowly. But that approach is no longer appropriate, Powell said. "You slow down. You maybe go a little less quickly".
After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy. Bloomberg Economics anticipates three increases.
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.
In November, Fed policymakers agreed to hold rates steady, leaving the benchmark rate unchanged in a range of 2% and 2.5%.
Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year.