Risky corporate debt flagged in Fed report

Risky corporate debt flagged in Fed report

Risky corporate debt flagged in Fed report

Federal Reserve Chair Jerome Powell has hinted that the Fed is nearing an end to its interest-rate hikes. Rather, he said, the Fed will assess the most recent economic and financial data in deciding whether or how fast to keep raising rates.

Stocks and interest-rate futures jumped in response.

Considering that there have been no interest-rate hikes since September, these comments tell the market one of two things, which is that the Fed has finally figured out where the neutral rate is, or they believe that a pause in tightening has become necessary, said BK Asset Management foreign exchange strategy MD Kathy Lien.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy ー that is, neither speeding up nor slowing down growth", Powell said during his speech.

That shift was reflected in money markets where expectations of Fed rate increases declined to around 47 basis points over the next year from 52 basis points earlier this week.

The stability report also identified potential economic shocks that could test the stability of the USA financial system, including potential spillover effects to the US from a messy exit of Britain from the European Union, slowing economic growth in China and other emerging markets, and trade tensions.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon. This softer language indicates the Fed will likely raise rates in December.

"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and global financial markets and strains in institutions", the report said.

In an interview with the Washington Post published on Tuesday, Trump rounded on his choice for Fed chairman, saying, "So far, I'm not even a little bit happy with my selection of Jay".

The report is the first of what the Fed intends as a twice yearly review of risks to financial stability, defined as the degree to which the financial system can continue to lend to businesses and households even when subjected to an outside shock.

He argued that rising interest rates and other Fed policies were damaging the economy - as evidenced by GM's announcement this week that it was laying off 15 per cent of its workforce - though he insisted that he is not anxious about a recession. For those reasons, this year's hikes have made the Fed the target of unusual public attacks from Trump - criticism that has accelerated with the past month's sharp declines in the stock market. Trump has complained that the Fed is threatening to undo the economic stimulus being provided by the tax cuts and that its rate hikes are unnecessary because inflation has remained relatively low.

Analysts think a rate hike next month is all but certain, possibly in part because they think the Fed doesn't want to appear to be bowing to pressure from Trump. But some economists say three rate increases for next year are beginning to look less certain.

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