WASHINGTON/INDIANAPOLIS--The U.S. central bank is flagging a turning point in monetary policy, as a Federal Reserve policymaker on Friday backed interest rate hikes in the "near term" but nodded to increasingly less certainty ahead.
Speaking at an event in Washington, Federal Reserve governor Lael Brainard said the economic picture was broadly positive but that risks were growing overseas and in the corporate debt markets at home. Tailwinds, she said, are fading as global growth slows, financial conditions tighten, and the boost from fiscal stimulus moderates.
“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded," she told the audience. "That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.”
Speaking less than an hour later, St. Louis Federal Reserve bank president James Bullard repeated his call for the Fed to pause its current cycle of interest rate increases, saying the central bank may already be restricting the economy and noting that inflation expectations are drifting downward. "We are at a crossroads in monetary policy," said Bullard, who next year will be a voting member on the Fed's policy-setting committee. With inflation contained and at no risk of breaking out, investors are nervous the Fed has gone too far, he suggested.
Recent market developments and an expected further interest-rate increase means there is a "real risk" the Treasury market yield curve could invert this month, Bullard said. The yield curve is said to invert when interest rates on shorter-term debt rise above rates on longer-term debt, and historically portends a coming recession.
Traders continue to bet on a Fed rate hike in two weeks, when policymakers will next meet and, importantly, release fresh forecasts for the rate path for next year and beyond. As of just a few months ago, Fed policymakers had indicated they would probably increase interest rates three times in 2019. But with recent data showing the housing market slowing, job gains cooling, and inflation giving no signs of rising above the Fed's 2-percent target, there are plenty of "reasons for hinting at a pause in March," Cornerstone economist Roberto Perli said in a note Friday.
