Federal Reserve Chairman's Magic Words Spur Stock Market Surge

Jeannie Matthews
December 4, 2018

A day after President Donald Trump's latest attack on the United States central bank, Federal Reserve chief Jerome Powell hinted that the key lending rate would move higher but said there was no preset course.

In what was seen as a shift in tone from remarks last month, Powell said Wednesday that the Fed's series of rate increases had brought policy to "just below" the range of estimates of neutral, where it neither spurs nor restricts the economy.

The "just below" language stands in contrast to Powell's October comments that interest rates were a "long way" from neutral, a remark some had blamed for triggering the sell-off in stocks that have shaken investors over the last two months.

According to Joseph LaVorgna, chief Americas economist at Natixis, "the Fed needs to stop raising rates". The position of Fed officials is that the criticism will have no impact on the institution, which was set up to guard its political independence. Next year, investors will hear from Powell after all 8 of the Fed's policy meetings, giving the markets even more chances to test their faith in the Fed chair.

But his top economic adviser, Lawrence Kudlow, told a group of reporters Tuesday morning that his boss has never suggested removing Powell.

These more measured reads on Powell's comments, however, are not what Wall Street says it heard on Wednesday.

The chairman added that the Fed regards no major asset class as significantly inflated, "as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom". The wording was already chosen so as not to further fuel market turmoil.

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A few participants who agreed further rate increases were likely to be warranted also "expressed uncertainty about the timing" as Fed officials discussed how to communicate a possible change in their approach to any further hikes.

As he did at an appearance earlier this month, Powell cited strong annual economic growth above 3 percent and unemployment at a near five-decade low of 3.7 percent.

Trump's attacks on the Fed generally worry economists and other market watchers because the abuse harkens back to President Richard Nixon's pressure on then-Fed Chairman Arthur Burns. Those increases have raised its benchmark rate to a still-historically-low range of 2 percent to 2.25 percent.

In his speech to the New York Economic Club, Powell again stressed that there was "no preset policy path" for interest rates and said the central bank had moved gradually, since "moving too fast would risk shortening the expansion".

"Many baby boomers like me are, however, reaching an age where a good report is, 'Well, there are a number of things we should keep an eye on, but all things considered you are in good health, '" said Powell. "I think that was what really sparked the market to go higher".

Other Fed watchers still expect at least one or two rate increases in 2019 before the central bank pauses to observe how the economy is performing.

The minutes of a meeting of the US Federal Reserve earlier this month show that nearly all officials expect an additional interest rate hike next month. Investors may be "over interpreting that phrase" he said when asked to define Powell's description of interest rates during an interview on FOX Business.

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