US Fed president hints at higher rates after Trump attack

WASHINGTON: A day after President Donald Trump's latest attack on the US central bank, Federal Reserve chief Jerome Powell hinted on Wednesday that the key lending rate would rise, but said he's not going to be able to do anything. There was no predefined course.

Powell said in a New York speech that interest rates remained "low by historical standards" and continued to stimulate the economy.

He added that economists felt that the Fed's key rate – at 2.25% – was "just below" the estimate of neutral, a rate that neither stimulates nor restricts the economy.

US equity markets jumped after comments as investors interpreted them as meaning the central bank was on the brink of tightening, resulting in eight rate hikes since December 2015 following the financial crisis. World.

The benchmark, the Dow Jones Industrial Average, rose 2.5%, rebounding after the sharp losses recorded recently.

"He uttered these magic words," said AFP Gregori Volokhine, of Meeschaert Financial Services.

However, central bankers have never announced their intention to stop raising rates once they are neutral – a moving target that can be debated. Instead, they will look at the economic data, especially inflation.

Ian Shepherdson of Pantheon Macroeconomics said the markets were reading too much in Powell's statement and that with a historically low unemployment rate, the Fed might not have any choice but to continue to increase.

With estimates of a "neutral" rate of the order of 2.5 to 3.5%, the Fed is "only" at a lower end of the range, but there are three mid-range hikes, "Shepherdson said in a statement. research note.

"DEMOCRATIC LEGITIMITY"

Trump again criticized Tuesday his head of the central bank, handpicked, saying the Fed was "far from its base" and that rate hikes undermined his work to curb the US economy.

The president of the Federal Reserve has chaired three interest rate increases this year and is expected to increase sharply again in December.

"They make a mistake because I have an instinct and that my intuition tells me more sometimes that someone else's brain can never tell me." Trump said in an interview with the Washington Post.

In his speech to the New York Economic Club, Powell again stressed that there was "no pre-established policy" for interest rates and said the central bank had made progress, because "going too fast could shorten the expansion".

But keeping rates "too low for too long" could create other risks, including an acceleration in inflation, he said.

"As always, our monetary policy decisions will aim to keep the economy on track," he said.

Powell and other officials rejected Trump's sustained political attacks, claiming that they had no influence over the deliberations of the independent central bank.

But many economists warn that the attacks could actually put pressure on the central bank for it to raise rates in order to demonstrate its independence vis-à-vis political influence.

Powell's speech focused on a new Fed report on the stability of the US financial system, but contained an unusual comment:

"By clearly and transparently explaining our policies, we aim to strengthen the foundations of democratic legitimacy for the Fed to meet the needs of the American public."

NO HAZARDOUS EXCESSES

He also explained the Fed's inaugural report on the stability of the US financial system, released earlier Wednesday, stressing that the central bank did not see "dangerous excesses" on the stock markets. And he said the financial system was now "significantly stronger" than before the 2008 financial crisis.

"My own assessment is that while the risks are above normal in some areas and below normal in others, the overall vulnerability of financial stability is moderate," Powell said.

While recognizing the growing concern over borrowing by already heavily indebted companies, it is unlikely for the time being that they "pose a threat to the security and soundness of the system" in the event of an economic downturn. .

At the same time, "the unresolved state of trade negotiations, Brexit negotiations, budget discussions between Italy and the European Union and disruptions related to cyber-cyber computing "remain risks for the global economy," he said.