Stocks markets surge on hint of slower rate hikes

Wall Street rallies after Powell says policy rate near neutral

Wall Street rallies after Powell says policy rate near neutral

Jerome Powell, chairman of the U.S. Federal Reserve, speaks at a meeting of the Economic Club of NY in New York, U.S., on Wednesday, Nov. 28, 2018. It indicated that the Fed is not committed to further rate increases next year and is very attuned to their demands, despite official claims that its policies are set by the state of the economy not the markets.

But many economists warn that by attacking the Fed for raising rates, Trump is actually putting pressure on the central bank to raise rates to demonstrate its independence from political considerations. The Fed altered its stance on rates to "just below the neutral rate" from its earlier articulated position of "a long way to neutral", lowering the chances of quick increases in the cost of funds.

In a speech Tuesday, Vice Chairman Richard Clarida suggested that the Fed would continue to strive to be "data dependent" by using the latest readings on the economy "with a healthy dose of judgment and humility" to determine its interest-rate policy. Any such slowdown - or pause - in its rate hikes would be welcome news for a stock market that has been battered by fears that the Fed's continued credit tightening could end the long bull market.

In a speech that comes in the wake of another volatile market selloff, Powell offered few clues on how much longer the USA central bank would continue tightening policy but he did say the policy rate, at 2-2.25 percent, is now "just below" the broad range of estimates of neutral, which in September was 2.5-3.5 percent.

Stocks swooned as investors bet the U.S. central bank would need more rate hikes to prevent the economy from overheating.

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At best, the coming meeting could see a shift in the majority of Fed representatives surveyed from three to two rate hikes in 2019.

Powell in his remarks Wednesday also raised the importance of policymakers staying flexible in charting a path of policy given that the effects of rate hikes show up with a lag - a point that was reinforced in the Fed's November minutes. The first is that we will hear from Powell more often. Home sales, vehicle sales, business investment and other parts of the economy that are sensitive to interest rates have begun to soften, evidence that the Fed's eight rate increases since 2015 are changing household and business behavior.

One additional twist investors will need to adjust to next year will be the potential for rate changes at any of the Fed's monthly gatherings. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said. "The market is putting too much weigh on the dovish arguments here; I don't think that is what he meant to signal". That would bring it to about the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 per cent to 3.5 per cent. Those increases have raised its benchmark rate to a still-historically-low range of 2 per cent to 2.25 per cent. He said the Fed's policy of gradually raising rates was an exercise in balancing the risks between too rapid increases that would shorten economic expansion and keeping interest rates too low, which could boost inflation and create financial imbalances.

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.

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