Fed acquiesce with concern but still sees US rate hikes

(Reuters) – Federal Reserve policymakers on Friday announced a further rise in interest rates, even though they raised relatively mild concerns about the global slowdown potential, which means markets are betting heavily rate hike cycle will soon subside.

The widening gap between market expectations and the interest rate trajectory set by the Fed just two months ago highlights the biggest issue facing US central bankers: how much weight to give a growing number potential alarm signals, even as US economic growth continues to drive down unemployment and create jobs?

"We are now at the point where we really need to be particularly data dependent," said Richard Clarida, the newly appointed vice president of the Fed, in an interview with CNBC. "I think it makes sense that the current situation is neutral and that the Fed's forecast is clear," he added, defining the "neutral rate" as a key rate between 2.5% and 3.5%.

Such a range involves two to six more rate hikes, and Clarida declined to say how much he would prefer.

He said he was optimistic about the increase in US productivity, suggesting that he would not see faster economic or wage growth leading necessarily to higher inflation or stricter policies. But he also sounded a slight warning.

"There is evidence of a global slowdown," Clarida said. "It's something that's going to be relevant because I'm thinking of the outlook for the US economy because it has a big impact on trade, financial markets, and so on."

In another interview with Fox Business, President Robert Kaplan, chairman of the Dallas Federal Reserve, said he was witnessing a slowdown in growth in Europe and China.

"I have the feeling that global growth will be a bit of a headwind and could spread to the United States," Kaplan said.

The Fed has raised interest rates three times this year and is expected to return to its target next month, in the range of 2.25% to 2.5%. Starting in September, Fed policymakers are expected to raise their rates three more times next year, which they will update next month.

Over the past week, policy bets on the Fed's policy suggest that even two rate hikes could be exaggerated. The performance of federal fund futures maturing in January 2020, viewed by some as the end point of the Fed's current rate hike cycle, dropped sharply to 2.76% in six months. trading days.

At the same time, long-term inflation expectations have also fallen rapidly. The inflation threshold, known as the inflation threshold, of inflation-protected Treasury securities, or TIPS, has fallen sharply in the past month. The break-even point of TIPS US5YTIP = RR over five years reached its lowest level since the end of 2017 earlier this week.

These market movements suggest that traders are seriously considering the prospect of a slowdown, limiting how far the Fed will eventually raise its rates.

In an interview with the Wall Street Journal, Philadelphia Fed chief Patrick Harker also issued a skeptical note.

"At this point, I'm not convinced that a December rate move is the right choice," he said, citing moderate inflation figures.

But not all decision makers seemed so worried.

Sitting back on a map of the world in a ballroom of the Waldorf Astoria Chicago hotel, Charles Evans, president of the Chicago Fed, has downplayed the risks that weigh on him big boys and girls' who understand the risks .

He told reporters that he remained convinced that rates should rise by about 3.25%, which would help to slightly limit growth and bring the unemployment rate to 3.7% at a level of more sustainable.

Asked about the risks associated with the global downturn, he has heard more and more talk about this problem, but that is not really in the numbers yet. But the next six months, he said, should be watched closely.

"There is no headline" about the risks to the economy at the moment, Evans told reporters. "International is a little slower. Brexit – no one asked me a question about it, thank you; (the slowdown) of the housing market: I think that all these factors are taken into account by the uncertainties that everyone faces, "he said.

"But for the moment, it's not enough to upset or adjust the trajectory I have in mind."

Nevertheless, added Evans, the risks should not be counted: "They could live more easily more easily, because they are somehow more present in the minds, if not in the forecasts."