Fed Chair’s comments on slower hikes to boost EMs

Fed Chair’s comments on slower hikes to boost EMs

The upcoming interest rate decision-which will come December 19- will serve as a big signal for both the Fed's conviction for continued economic growth as well as the equity market's resilience to yet another hike.

The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the U.S. dim the appeal of risky assets.

The central bank expects the unemployment rate to remain historically low next year.

The Fed held rates steady at its November meeting, and made no mention in its statement after that session about the sharp sell-off in equity markets in the weeks before it.

He said then that growth overseas was likely to weaken and that U.S. fiscal stimulus, which had goosed consumption, would soon fade.

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.

In a speech Wednesday, Fed Chairman Jerome Powell raised similar points, which sent stock markets surging. It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.

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Kashkari said he was "more worried" about that the Fed raises rates "prematurely" when the job market "has slack" and the wage growth hasn't picked up yet.

The need for "further gradual rate increases" as appropriate to keep the current recovery on track has been a staple of recent Fed policy statements as the central bank nudged rates back toward more normal levels after a decade near zero. 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". The FOMC is likely to link future interest rate decisions more closely to incoming data and then decide on a case-by-case basis.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy. USA markets were sent soaring Wednesday after Fed chief Jerome Powell said borrowing costs were still historically low but only "just below" the neutral level, a rate that neither stimulates nor restrains the economy. "Not even a little bit. And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing", he was quoted as saying in the report. 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. Bloomberg Economics anticipates three increases.

We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilising financial imbalances. "However, market pricing implies that while the Fed is likely to hike in December (about 80% priced), it will move only once in 2019".

Joblessness stood at 3.7% in October, well below the rate the Fed sees as sustainable in the longer run. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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