Published: Sat, October 27, 2018
Markets | By Noel Gibbs

New Fed vice chair signals more rate hikes ahead

New Fed vice chair signals more rate hikes ahead

President Trump told the Wall Street Journal it is too early to tell whether he made a mistake in appointing Jerome Powell, a lawyer by trade and former Federal Open Market Committee (FOMC) voting member, as chair of the FOMC and Federal Reserve at the beginning of 2018.

Trump claims Fed chairman Powell "almost looks like he's happy" to be raising interest rates.

Presidents are not supposed to comment on monetary policy to protect central bank independence but Mr Trump has started to make a habit of it.

While the reports from the Fed's regional banks reflected a healthy U.S. economy, with "modest to moderate growth", President Donald Trump's aggressive tariff strategy, which has drawn retaliation from trading partners, is potentially adding fuel to inflation.

If that is the case, then the current half-century low unemployment rate of 3.7 percent would give no inherent reason to push interest rates past a "neutral" level.

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Asked in the Wall Street Journal interview what he saw as the biggest risks to the USA economy, Mr Trump said: "To me the Fed is the biggest risk, because I think interest rates are being raised too quickly". He feels that this fluctuation in the interest rates will have a negative impact on the economy.

The last hike already drew criticism from Trump.

The Fed has raised interest rates three times this year as it seeks to prevent a vibrant economy from overheating, and it is widely expected to raise rates again by 0.25 percent in December.

The recent equity selloff early this week was driven by a series of fears, including a global economic slowdown and further Fed tightening, according to analysts. "They have a right to act the way do", Hatch said.

Trump said the Fed poses the biggest risk to the U.S. economy, adding that higher interest rates would slow growth and add to the national debt. "The particular danger for him is that weakness could coincide with the 2020 election campaign, when he would be most vulnerable", says Paul Ashworth, chief USA economist at Capital Economics.

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Continued volatility in asset prices including stock prices are indicators of financial conditions, he added.

Clarida noted that the job market could strengthen further without generating inflationary pressures, since prime-age labor force participation remains low in the country.

He warned, however, that monetary policy operates with a lag, and with inflation presently near the 2 percent goal, it would be important to monitor inflation projections closely, he said.

The law governing the Federal Reserve allows its governors to be "removed for cause by the president", but it doesn't specify what "cause" means.

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