Federal Reserve Chairman's Magic Words Spur Stock Market Surge

05 December, 2018, 03:40 | Author: Kathy Ellis
  • President Trump Says the Federal Reserve Is a 'Much Bigger Problem Than China'

President Donald Trump laid into the Federal Reserve and Fed Chairman Jerome Powell once again.

"We see no major asset class", Chairman Powell said, "where valuations appear far in excess of standard benchmarks".

In an appearance earlier this month, Powell cited strong annual economic growth above 3 per cent and unemployment at a near five-decade low of 3.7 per cent.

Currently, the Federal Open Market Committee forecasts three quarter-point hikes for next year after a December increase, which is virtually guaranteed.

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. Mr Trump told Washington Post on Tuesday that he was "not even a little bit happy" with the Fed chief.

The S&P 500 Index rose the most since March, while yields on two-year Treasuries fell 2 basis points, as traders dialed back their expectations for interest-rate hikes. They offered few explicit clues, however, as to how many hikes he thinks will be necessary in 2019. But the likely pace of rate increases next year remains a subject of speculation. For those reasons, this year's hikes have made the Fed the target of unusual public attacks from Trump - criticism that has accelerated with the past month's sharp declines in the stock market.

Mr Powell's comments appear to implicitly reject arguments from President Trump that past interest rate rises have been a mistake.

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"What a difference having a written and carefully vetted speech makes with respect to speaking freely and without a script, " Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington, told clients on Wednesday. His speech to the Economic Club of NY sent markets soaring more than 600 points on Wednesday.

The current range for the central bank's benchmark federal funds rate, which banks charge each other for overnight lending, stands at 2 percent to 2.25 percent.

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes. Speculation is growing over whether the Fed will change this policy at next month's meeting. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation.

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

The Fed needs to raise interest rates to stave off inflation but investors fear they may also slow down economic growth.

In its report, the Fed warned that markets and financial firms will need to continue to adjust to plans for future rate hikes after years of low interest rates following the financial crisis.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral. But Shayne and I believe that on this dovish statement 3 rate increases for next year look less certain.

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