Despite Fed Chair Powell’s unsettling comments in October that ‘We may go past neutral, but we're a long way from neutral at this point, probably’ and the September Fed dot plot looking for a rate hike in December and a further three 25 basis point rate rises in 2019 we think there are also some signs of a more cautious approach emerging.
A further 25 basis point increase in the Fed Funds target range is expected in December. But the debate of whether it will then be appropriate to pause seems to be gaining some traction, particularly as data continues to point to some further easing in both the US and global growth momentum. This debate is particularly pertinent given that the Fed is contracting its balance sheet at the same time as raising rates.
Raphael Bostic, the Atlanta Fed President and a FOMC voter recently said: ‘I don't think we are too far from a neutral policy, and neutral is where we want to be. We may not be there quite yet, but I am inclined to think that a tentative approach as we proceed would be appropriate.’ This view was echoed by Robert Kaplan, the Dallas Fed President and a non-voter, also stated that he thinks ‘we’re getting close or approaching a neutral’ and ‘I think we’d be wise to be very patient and gradual from here.’ Patrick Harker, the Philadelphia Fed President and a non-voter, stated in a WSJ interview last week: ‘We’re not seeing the recent data telling us that inflation’s moving rapidly past our target. So I think we have some time to let this evolve.’ He also said that ‘at this point I am not convinced that a December rate move is the right move, but I need to watch the data over the next few weeks’. Neel Kashkari, the Minneapolis Fed President and a non-voter, said ‘I’m not seeing signs that the U.S. economy is overheating, so I don’t think we need to pre-emptively raise interest rates’ and ‘One of my concerns is that if we preemptively raise interest rates, and it’s not in fact necessary, we might be the cause of ending the expansion and triggering that recession’.
In January 2019 the Fed board will change with James Bullard (St Louis Fed President), Charles Evans (Chicago Fed President), Esther George (Kansas Fed President) and Eric Rosengren (Boston Fed President) taking up the rotating regional Fed positions. So we would keep an eye on any comments from them into year-end and the updated December FOMC ‘dot plot’.