Gold pares gains after Fed minutes affirm December rate hike

Dwayne Harmon
December 1, 2018

The FOMC also discussed how best to manage short-term interest rates in the future.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes.

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.

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

Nearly all participants at the November 7-8 meeting believed another rate increase "was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations", the minutes said. "Bloomberg Economics does not take it as a signal of the Fed dialing back on the number of expected rate hikes, but rather as an intent to be more flexible in setting policy as they approach the neutral rate".

On Wednesday Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment and inflation near its 2 percent target. The fear of higher United States interest rates - fuelled by a surging economy - has been a key driver of a global equity sell-off over the past few months, while the dollar has soared as traders put cash into the U.S. looking for better, safer returns. However, it did signal a potential shift in tone about the pace of future rate hikes. 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. The minutes showed a couple of participants felt the benchmark fed funds rate "might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity".

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"If you look down the road, you see challenges ahead, and they're challenges that are typical in a cycle", said Powell speaking earlier this month at the Federal Reserve Bank of Dallas. And Powell's own communications plans to end each meeting with a news conference starting next year mean he needs a clear message for each meeting, starting next month.

Part of Powell's caution reflects inherent uncertainty over how the economy responds to interest rate increases.

The minutes of the November meeting showed Federal Open Market Committee policymakers had on their agenda a series of issues, ranging from a tightening of financial conditions, global economic risks, "and some signs of slowing in interest-sensitive sectors", that had begun to sway their assessment of the economy. Three of those increases have been under Powell.

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.

One challenge for the Fed is that officials aren't sure where a neutral rate actually lies.

"There is a great deal to like about this outlook", said Powell on Wednesday.

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