TREASURY Secretary Steven Mnuchin said Thursday that market reaction following the Federal Reserve’s two-day policy meeting this week has been completely overblown, and he suggested the central bank may not need to raise rates at all next year if inflation remains low.
In an interview with the Fox Business Network, Mr. Mnuchin said he thought markets were disappointed in Fed Chairman Jerome Powell’s comments at a press conference Wednesday, when he said central bank officials expect to raise rates twice next year and didn’t intend to tweak their plans for shrinking the Fed’s balance sheet
Fed officials voted Wednesday to raise their benchmark federal-funds rate by a quarter percentage point to a range between 2.25% and 2.5%. They also penciled in two rate increases in the year ahead, down from the three moves they anticipated in September.
Stock markets fell after Wednesday’s decision. The Dow industrials slid 352 points, or 1.5%, to close at 23324 on Wednesday, after falling as many as 513 points while Mr. Powell spoke. The index had been up about 300 points just ahead of the rate decision. Stocks were slumping Thursday morning too, before Mr. Mnuchin’s interview.
“I think clearly you have a situation here where the market has overreacted to the Fed’s comments, and you see programmed trading taking over,” Mr. Mnuchin said.
Asked if he thought the Fed may not need to raise rates next year amid low inflation and sturdy U.S. economic growth, Mr. Mnuchin said, “I think that’s right.”
He also cautioned that markets should look not only at the Fed officials’ median projection, which implied two more rate increases in 2019, but they should also look at the range of projections on the Fed’s so-called dot plot. That showed two officials expect to hold rates steady next year, while four others expect just one increase. By contrast, five officials project two rate rises and six policy makers expect three moves.
“The high end of the range came down significantly and there’s still a pretty wide dispersion,” Mr. Mnuchin said. “So there’s clearly people on the committee who think they don’t need to raise rates much here.”
Fed officials on Wednesday also dialed back their projection for U.S. economic growth next year, to 2.3% from 2.5% in September. But Mr. Mnuchin said he’s still optimistic the U.S. economy will grow 3% in 2019, thanks to continued business investment in the wake of this year’s tax code overhaul.
Perhaps more important, he said, Fed officials dialed back their expectations for inflation next year. The Fed’s preferred inflation gauge ticked further below the central bank’s 2% target in October, the latest month for which data is available, suggesting price pressures remain subdued.
“If we continue to have low inflation, given where we are, I think you’re going to see a different situation,” Mr. Mnuchin said.
He also played down market concerns about the Fed’s plans to shrink its portfolio of bonds and other assets, frequently referred to as the balance sheet.
Mr. Powell and others have repeatedly emphasized that the balance sheet reduction will be set on autopilot, and he reiterated that stance Wednesday. Some market participants are worried, however, that the portfolio reduction may be tightening financial conditions.
The Treasury’s public debt issuance has climbed over the past year, in part because the Fed is reinvesting fewer Treasury securities, instead allowing them to roll off the balance sheet.
Mr. Mnuchin said Treasury officials are in close contact with the Fed about Treasury issuance and the balance-sheet policy. Shrinking the portfolio now will give the Fed more capacity to respond to future weakness, he added.
“We’re comfortable with the supply and don’t see that as really as big of an issue as the market seems to be focused on,” he said. - WSJ
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