Markets may have misread Powell speech, analysts say

Was Post Fed Chair Speech Rally a Market Overreaction

Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez

Federal Reserve Board Chairman Jerome Powell speaks at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., June 13, 2018.

"Powell's comment that the benchmark funds rate is "just below the broad range of estimates of the level that would be neutral for the economy" was enough to spark a strong bounce in United States equities, while the 10 year yield briefly dipped below 3% for the first time since mid-September". From the Fed's perspective, the interest rate hike in December will probably lead to an interest rate level that will no longer justify the automatism of a quarterly interest rate hike.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy.

It promises to confirm investor expectations that the Fed will raise its interest rate when it meets later this month. Futures showed the amount of tightening priced in for 2019 slipped to 25 basis points - equivalent to just a single rate hike.

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The change comes months after Powell indicated plans to raise interest rates and cool down the U.S. economy, moves that run counter to President Donald Trump's expansionary moves, including last year's tax cuts.

During the Fed's November meeting, participants discussed a number of risks that could sweep away their rosy economic outlooks and change the path of policy, including "high levels of uncertainty" over the impact fiscal and trade policies on growth and inflation.

Powell's comments sparked a surge in a stock market that had struggled of late and came in the wake of repeated criticism of the Fed's rate increases by President Donald Trump.

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly. "Not even a little bit. However, several dealers noted that they perceived recent communication regarding the neutral policy rate and its role in informing monetary policy as being unclear or at times inconsistent with prior Fed communication", the survey said in the comments section.

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But he cautioned that things could turn out a lot differently than the Fed expects. 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 behaviour. "I think that's what we've been doing".

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. Bloomberg Economics anticipates three increases. But, when taken with the assessment of the Fed leader, it also holds the possibility of clouding the forecast for future rate hikes in 2019.

Mr 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 per cent target.

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