As Trump goes low, Fed goes high

Fed chairman defends interest rate hikes as Trump’s attacks show no sign of working

In immediate focus was the speech by the Fed's Powell to be given later on Friday at the Jackson Hole, Wyoming, meeting of central bankers.

Fed watchers will be listening for anything Powell has to say about financial turmoil in emerging markets, the economic threats posed by the growing trade war launched by President Donald Trump and Trump's criticism of the Fed's recent interest rate hikes.

But then-Fed chairman Alan Greenspan resisted calls for higher rates and inflation remained much lower than monetary hawks predicted.

The Fed "has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides", Mr Powell said.

Given this uncertainty, Powell said, the Fed's current cautious approach is the right one. But, as he did with rate increases, he signaled that Fed officials would do what they think is right for the economy regardless of political pressure.

The Fed has raised rates twice since Powell became Fed chair in February, and two more rate hikes are penciled in by year end.

"Over the course of a long recovery, the USA economy has strengthened substantially", Powell said.

Kansas City Fed President Esther George, who in 2016 dissented several times in favor of higher rates, made a similar point, in three separate broadcast interviews ahead of the conference. The Australian dollar fell about 0.8 percent in the morning but clawed back in the afternoon to sit 0.2 percent lower.

Fed funds and eurodollar futures prices indicate financial markets expect only one rate hike next year, leaving rates in a range of 2.50 percent to 2.75 percent by mid-2019, up from the Fed's current target of 1.75 percent to 2.00 percent.

The president of the Fed inherited a well-defined and predictable strategy from his predecessor Janet Yellen to control the stimulus.

The unemployment rate stood at 3.9% in July.

Many have seen Trump's complaints about the Fed's rate hikes as an intrusion on the central bank's longstanding independence from political influence.

Asian markets fell broadly and the dollar held on to recent gains on safe-haven demand while oil rose on expectations that US sanctions on Iran will cut significant volumes of crude from the market.

St. Louis Federal Reserve President James Bullard said Friday that the central bank should hold off on rate hikes for the rest of 2018, while Cleveland Fed President Loretta Mester backed further increases.

Although Trump has frequently boasted incorrectly that the USA economy is doing better than it ever has, he complained that "I should be given some help by the Fed".

In a speech today at the Fed's retreat in Jackson Hole, Wyo., Powell suggested the policymakers would stick to their schedule of slowly raising the key interest rate. Burns did, and the move is widely believed to have helped fuel a decade of high inflation.

USA presidents rarely criticize the Fed, whose independence is considered important for economic stability. As a result, the Fed's path of gradual rate hikes was appropriate and "there does not seem to be an elevated risk of overheating".

Powell's speech discussed at length the challenges of monetary policy at a time when economic benchmarks - such as estimates of full employment or the neutral policy rate - are uncertain.

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