Fed emphasises flexible policy path after likely December hike

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Federal Reserve Chairman Jerome Powell, faced with escalating attacks by President Donald Trump, defended the central bank's move to gradually raise interest rates, saying the policy is necessary after almost a decade of historically low rates.

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.

His renewed focus on the "neutral" level of interest rates as a potential turning point for policy that until now has been on a steady tightening path is echoed by the minutes.

"A couple of participants noted that the federal 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 and put downward pressure on inflation and inflation expectations", said the minutes.

Speaking at the Economic Club of NY on November 28, Jerome Powell outlined the Fed's decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation's financial stability.

After the release of the Fed's meeting minutes, traders of interest-rate futures stuck to their bets that the Fed would slow rate hikes next year, to just one.

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"We will be paying very close attention to what incoming economic and financial data are telling us".

"Recent public comments suggest Fed officials are amenable to parking the fed funds rate near neutral, which most FOMC participants estimate near 2.9 percent to 3 percent, and then pausing to assess the health of the economy as it adapts to less accommodative policy".

In a speech Wednesday, Fed Chairman Jerome Powell raised similar points, which sent stock markets surging.

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.

Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish".

"Interest rates are still low, by historical standards, and they remain just below the range of estimates of that level, that would be neutral for the economy", said Powell.

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"Based on experience over recent years, such a regime was seen as providing good control of short-term money market rates in a variety of market conditions", the minutes said.

"If the USA economy is creating 200,000 jobs a month, month-after-month, we're not at maximum employment", Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CNBC. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates".

"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce".

With last year's deep tax cuts and fiscal stimulus from Congress, the world's largest economy continues to hum: producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed's two percent target. And we've got the Fed's grand 2018 finale the following week.

"What do you do?" said Powell in NY. In a sign of possible coordination or at least agreement among influential policymakers, his phrasing was the same as used by the Fed's No. 2, Richard Clarida, just a day earlier. But that doesn't mean rates won't rise further, as most officials said another rate increase was likely, perhaps as soon as next month. Three of those increases have been under Powell.

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

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