Published: Sat, December 01, 2018
Money | By Wilma Wheeler

Fed Chief's Remarks On Economy And Interest Rates Cheer Investors

Fed Chief's Remarks On Economy And Interest Rates Cheer Investors

The impact of Powell's comments is visible in the spread of Euro-dollar interest rate futures between Dec 2018 and Dec 2019.

In his speeches after the Federal Open Markets Committee, Powell emphasised that Fed was long way from the neutral rate and also hinted that in the short term the Fed Fund rate might exceed the neutral rate. Stocks swooned on those remarks as investors bet the USA central bank would need more rate hikes to prevent the economy from overheating. Trump has charged that the Fed is "going wild" and "going loco" and that the rate hikes are threatening to ruin the economic gains generated by his policies, including last year's tax cuts.

"It removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", said Roberto Perli, an analyst at Cornerstone Macro, in a report Wednesday.

Harvard professor of economics Martin Feldstein discusses why the Federal Reserve should continue to raise interest rates.

USA stock markets moved sharply higher on the news.

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", Powell said.

Powell has been gradually raising rates since he was confirmed to his position by Trump in January.

"Interest rates are still low, by historical standards, and they remain just below the range of estimates of that level, that would be neutral for the economy", said Powell.

Powell's remarks Wednesday lit a rally in stocks, lifting the major averages as much as 2% at their best levels. On Wednesday he referenced a range, and in October he likely referenced a median.

The chance of four increases, to a target range of at least 3%-3.25% by the end of 2019 implied by the Fed's dots, is given just an 8.6% probability, down from the already low 18.6% probability a month ago, according to the CME Fed Watch site.

The president previous year selected Powell, at the time a Fed board member, to lead the central bank after a highly public selection process in which he chose not to offer a second term to Chair Janet Yellen.

It was a "rookie mistake, " Omair Sharif, senior USA economist at Societe Generale, said Wednesday in a note to clients.

While the Fed is expected to raise rates by a quarter point at its meeting on Dec 19, it has forecast to have three more hikes next year.

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.

Analysts think a rate hike next month is all but certain, in part because they think the Fed doesn't want to appear to be bowing to pressure from Trump. Salesforce.com surged 10.3 per cent. Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China. Jerome Powell has said the Fed's key rate is "just below" neutral.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

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