Feds Powell, in dovish shift, says rates near neutral

Eileen GuzmanDec 03, 2018

"I am pleased to say that our economy is now close to both of those objectives", Powell said in an appearance at the Economic Club of NY.

Federal Reserve Chair Jerome Powell on Wednesday appeared to signal the US central bank is nearing an end to its interest-rate hikes, saying the Fed's policy rate is now "just below" a level that neither brakes nor boosts a healthy economy. The Dow Jones Industrial Average had its best day in nearly eight months, closing up 572 points, or 2.3 per cent, at 25,320, while the S&P 500 rose 2.3 per cent to 2,743.

Referring to the Fed's gradual increases in its benchmark rate, Powell said, "there is no preset policy path".

Powell said in a speech in NY that interest rates remained "low by historical standards" and still provided stimulus to the economy.

On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a "long way" from a so-called neutral level and that the Fed might even tighten policy beyond that level. "In addition, the effect of a stronger dollar and weaker foreign economies on trade could affect the creditworthiness of US firms, particularly exporters and commodity producers". The reading badly missed market consensus as the number of newly built, unsold homes sitting on the market climbed to its highest level since 2009.

The Fed has raised rates three times this year and has been saying the economy is in strong shape.

Some policymakers agreed with the idea of further rate increases, but also "expressed uncertainty about the timing".

"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell". Its removal would flag a possible pause in roughly quarterly hikes that had been expected to continue through 2019, without committing the central bank to moving or not moving at any particular meeting.

While the speech had "cleaned up after Powell's sloppy language last month", markets may have reacted too strongly to the comments, said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

The equity rally follows months of Fed trash talking by President Trump, most recently on Tuesday. The courts ruled decades ago that "for cause" meant more than a policy disagreement with the president. The wording was already chosen so as not to further fuel market turmoil.

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. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

"There is a great deal to like about this outlook", Mr. Powell said.

The minutes of the Fed's November 7-8 meeting showed 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.

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 noted the word "bubble" wasn't mentioned in the report, though he said some asset prices, such as corporate debt, were high relative to the past. Bloomberg Economics anticipates three increases.

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