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US Fed to hike rates again but hints at pause in 2019

This article is more than 12 months old

WASHINGTON The US Federal Reserve is likely to raise interest rates in the coming week but policymakers have begun to signal they may take it a bit slower in 2019.

Waning growth, a trade war, tame inflation and an increasingly scary geopolitical scene mean the central bank could make clear it plans to slow or even pause the current tightening cycle - instead taking a wait-and-see approach.

Since October, Fed officials have watched Wall Street take a wild ride, diving and rallying as remarks from Chairman Jerome Powell and others veered between indicating gradual hikes would continue or pause.

In recent days, economists have cut their forecasts for the number of rate hikes they expect next year to one or two from as many as four.

Economists say the Fed is aware of slowing growth in China and Europe, Brexit chaos, political turmoil in France and Italy's budget woes. In the US, job growth has remained strong this year but inflation has settled at the Fed's two per cent target, despite fears the strong economy might ignite prices.

Add to this the fading boost from recent tax cuts and government spending, and expectations US growth will slow, and the future can seem highly uncertain. As of Friday, futures markets put the probability of a rate hike this week at 81.8 per cent.

The Fed's mandate is not to protect stock market investors but to maximise employment at sustainable levels while keeping a lid on inflation. But gyrations on equities markets can worry policymakers, because a crash can sap consumer and business confidence, making households and companies cut spending, which is never good for GDP growth.

"I think they'll be watching carefully what pushes the markets, not because the markets per se are important to them but because the markets are the way monetary policy is conveyed to the rest of the economy," said Mr Donald Kohn, who was the Fed's vice-chairman from 2006 to 2010. - AFP