Fed Governor Powell Talks Up Rate Hike Odds

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Another day, another Fed head calling for a rate hike. Federal Reserve Governor Jerome Powell was speaking at the Economic Club of Indiana in Indianapolis on Tuesday, and he talked up the chances of a rate hike for December.

Powell’s speech admits that the economy has recovered slowly but steadily since the end of the Great Recession in 2009. He said that the Fed’s view is now reasonably close to achieving full employment and close to the Fed’s 2% inflation objective. Powell also discussed that the economy faces real challenges over the medium and longer terms.

The most important takeaway should be view in his ending quotes (see below).

Powell warned that many analysts believe that the neutral rate of inflation is lower today and will only return to its long-run value over time. What is interesting is the admission that today’s low interest rates are not as stimulative as they seem as inflation has run consistently below-target and housing construction remains far below pre-crisis levels.

Another issue brought up was that interest rates being so low has put central banks in a spot in which they are not well positioned to counteract a renewed bout of economic weakness.

Powell also made the same warning that we have seen from other Fed heads in 2016: that persistently low interest rates can raise financial stability concerns, where very low interest rates for too long can lead to excessive risk-taking to unsustainably high asset prices and credit growth.

If there is one part of Powell’s speech that matters, it is the part confirming the coming rate hike trend as more likely than not. His speech on Tuesday said:

Turning to the outlook for monetary policy, incoming data show an economy that is growing at a healthy pace, with solid payroll job gains and inflation gradually moving up to 2 percent. In my view, the case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month. Of course, the path of rates will depend on the path of the economy. With inflation below target, relatively slow growth, and some slack remaining in the economy, the Committee has been patient about raising rates. That patience has paid dividends. But moving too slowly could eventually mean that the Committee would have to tighten policy abruptly to avoid overshooting our goals.

24/7 Wall St. recently released its 15 reasons why a Federal Reserve rate hike looks certain for the December 14 FOMC meeting.

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