With the Federal Reserve expected next month to raise rates to what some USA central bankers believe is at or near a neutral level, Chairman Jerome Powell is retuning his message to signal a more cautious approach on further rate hikes next year.
The FOMC also discussed how best to manage short-term interest rates in the future.
Until now, strong economic data and new fiscal stimulus made the central bank more determined to gradually lift rates to neutral because the economy is expanding solidly and unemployment continues to fall.
"I do think over time folks will have to get used to the idea that we can and will move at any meeting", said Powell in a question-and-answer session in Dallas.
Federal Reserve Chairman Jerome Powell on the potential economic impact of the Federal Reserve's gradual interest rate increases.
Minutes of the November 7-8 meeting of the Fed's rate-setting body, the Federal Open Markets Committee, show that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices. It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.
Minutes released yesterday from the Fed's November 7-8 policy meeting showed disagreements about the path of interest rates, with some policymakers worrying that tightening too fast could stem economic growth.
On Wednesday Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment and inflation near its 2 percent target. This gap, which measures expectations on rate increases in the next year, has narrowed to 23 basis points, indicating that traders are not penciling in more than one increase in 2019, although the Fed's median projections still point to three increases next year. The minutes showed a couple of participants felt the benchmark fed funds rate "might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity". At some point rates will cross into a neutral zone for the economy and then, if the Fed keeps pushing them up, they will become restrictive, slowing growth.
As a result, "almost all" Fed members said a rate hike "was likely to be warranted soon".
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"Powell is not suggesting that since they are just below the range they may stop soon". But that approach is no longer appropriate, Powell said.
"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce".
October's Wall Street sell-off and a rise in bond yields tightened financial conditions while some sectors most sensitive to interest rates, such as the housing sector, had already begun to slow.
Powell said "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".
After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy.
The Fed is expected to increase rates again in December and has estimated three more increases might be necessary next year.
One challenge for the Fed is that officials aren't sure where a neutral rate actually lies.
"There is a great deal to like about this outlook", he added.