Fed's Powell signals interest rates near neutral in speech

01 December, 2018, 12:59 | Author: Sally Reid
  • Was Post Fed Chair Speech Rally a Market Overreaction

Nearly all Federal Reserve officials at their last meeting agreed another interest rate increase was "likely to be warranted fairly soon", but also opened debate on when to pause further hikes and how to relay those plans to the public. The president has blamed the Fed for the steep two-month fall in the stock market and the possibility that his efforts to boost growth with a major tax cut will be thwarted by rising interest rates.

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

The Fed held rates steady at its November meeting, and made no mention in its statement after that session about the sharp sell-off in equity markets in the weeks before it.

"We keep thinking we're at maximum employment".

But, wait: Didn't the head of the Fed just give investors optimism that it was nearing its comfort zone for the cost of cash - its so-called neutral rate?

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY. It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.

By saying rates were slightly lower than the level he perceives as "neutral", the Fed chief's statement appears to be suggesting at least one more interest rate increase is coming in the near future.

It was a "rookie mistake, " Omair Sharif, senior USA economist at Societe Generale, said Wednesday in a note to clients. With previous hikes in March, June, and September, one more rate hike this year would put 2018's rate of increases on par with 2006, the last year the Fed increased rates prior to the crash.

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Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

Ironically, it was a reference to that guidepost that led to what in retrospect looks like a communication stumble, when stocks tumbled in early October after Powell's remark that interest rates were a "long way" from neutral and might even need to rise above that level. "As you get closer you tack a little bit more".

Powell said on Wednesday that US interest rates were "just below" neutral, less than two months after saying rates were probably "a long way" from that point.

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy.

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added. Three of those increases have been under Powell.

Tim Duy, a veteran Fed watcher and professor of economics at the University of OR, believed that the Fed remains likely to hike in December, but there's a lot of uncertainty about the pace of rate hikes next year.

"The neutral rate is an absurd concept". "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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