Fed's Quarles stresses that policy is data-dependent

A top US central bank official towed on Monday Federal Reserve chief, Jerome Powell's, line from the week before that official interest rates were near the lower bound of what was deemed to be a 'neutral' level, but clarified that it remained to be seen where exactly they would settle.

Speaking at the start of the week at the Council on Foreign Relations, Fed governor, Randal Quarles, reportedly reiterated that central bank officials in the US believe the neutral rate of interest lies between 2.5% and 3.5%, meaning that Powell's remarks that the range is now closer was "quite accurate".

But Quarles added that: "Where we will end up in that range will depend on the data we receive and our assessment of the performance of the economy over the next year."

His remarks regarding the increasing importance of the incoming data as part of officials' decision-making progress going forward also echoed the views put forth by Fed vice-president, Richard Clarida, in a speech delivered on 28 November.

Quarles reportedly also said that the concept of 'neutral' can "cloud communications".

Following marks from Clarida and Powell the week before, financial markets had moved to fully price-in just one 25 basis point interest rate hike in the Fed funds rate in 2019.

Analysts at Barclays Research however believed markets had gotten it wrong.

On 2 December, Barclays's Head of US Economics Research, Michael Gapen, said: "There are two main reasons we think the market’s interpretation of the Fed’s message is off.

"One has to do with how the Fed normally communicates at this stage of a tightening cycle. The second has to do with uncertainty about the Fed’s estimates of potential growth. As the Fed closes in on neutral, backing away from forward guidance is prudent and is what the Fed has done in the past. It does not signal a major change in Fed thinking.

"In addition, the main source of uncertainty that the Fed is debating presently is the degree to which potential growth may be rising. Faster potential growth is linked to higher neutral rates, not lower. We retain our outlook for quarterly rate hikes through the end of 2019 on above-trend growth, falling unemployment, and underlying trend inflation at or near the Fed’s mandate."