Why the Fed may not hike rates

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Real Estate

After another tumultuous week, investors are looking ahead anxiously to two events that could crucially affect Federal Reserve policy and escalating trade tensions, key factors roiling the global financial markets.

The first comes on Wednesday, when Fed Chairman Jerome Powell addresses the Economic Club of New York; investors will be looking for hints about future monetary policy. Then, on Saturday, President Donald Trump and his Chinese counterpart, Xi Jinping, are slated to meet at the Group of 20 summit in Buenos Aires, a highly anticipated get-together that, some hope, will yield an agreement staving off further protectionist rhetoric and measures.

Sharp slides in stocks, corporate credits, and commodities are increasing doubts that the Fed will impose more than a single interest-rate increase in 2019. While a one-quarter-of-a-percentage-point rise in its key interest-rate target is still all but certain at its December policy meeting, market participants are growing increasingly skeptical that the central bank will follow through with the three hikes in 2019 implied by its most recent “dot plot” of projections.

Regarding Fed policy, investors will want to hear from Powell the degree to which the central bank’s views effectively have been marked to market. In early October, he expressed strong confidence in the U.S. economy’s strength and suggested that the central bank is far from a “neutral” federal-funds rate target—that elusive and unobservable level for overnight interbank loans that neither spurs nor slows the economy.

Recent economic data are consistent with those views, notably, real gross domestic product growing at a robust 3.5% annual rate (after inflation adjustment) in the third quarter, only a slight slowing from the heady 4.2% of the second. Unemployment, meanwhile, remained at a 49-year low of 3.7% in October, with nonfarm payrolls surging 250,000 after a hurricane-depressed rise of 118,000 in September.

But these are mainly backward-looking indicators. Other signs have been less favorable, and Fed officials have been softening their rhetoric about expected rate hikes next year. In particular, housing—the economy’s most interest-sensitive sector—is clearly slowing, as this column has pointed out.