INSUBCONTINENT EXCLUSIVE:
Investors bet the US central bank would need more rate hikes to prevent the economy from overheating.NEW YORK: US Federal Reserve Chair
Jerome Powell injected investors with a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now "just
below" estimates of a level that neither brakes nor boosts a healthy US economy, comments that many investors read as signalling the Fed's
three-year tightening cycle is drawing to a close
Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell intended to send a message or was simply
misunderstood.On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a
"long way" from a so-called neutral level and that the Fed might even tighten policy beyond that level
Stocks swooned on those remarks as investors bet the US central bank would need more rate hikes to prevent the economy from overheating.The
possibly dovish shift in language on Wednesday came as President Donald Trump stepped up attacks on Powell, criticizing the Fed's rate
hikes as undercutting his economic and trade policies
Trump told the Washington Post just on Tuesday that he is "not even a little bit happy" with the Fed chief.Powell "gave the market, and
presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was
probably too aggressive and opening to slowing the rate of hikes," said Oliver Pursche, vice chairman and chief market strategist at
Bruderman Asset Management in New York.The Fed has settled into a quarterly rate-hike cycle and is still expected to raise rates again next
month, in what would be the fourth hike this year
But signs of a slowdown overseas and nearly two months of market volatility - including another sharp selloff last week - have clouded an
otherwise mostly rosy US picture in which the economy is growing well above potential and unemployment is the lowest since the 1960s."We
know that things often turn out to be quite different from even the most careful forecasts," Powell said at an Economic Club of New York
"Our gradual pace of raising interest rates has been an exercise in balancing risks."Rates "are still low by historical standards, and they
remain just below the broad range of estimates of the level that would be neutral for the economy," he added.COMMUNICATION ERRORFactually,
Powell's remarks on Wednesday and in October are both true
On Wednesday he referenced a range, and in October he likely referenced a median
The benchmark rate, now at 2.00-2.25 per cent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but
is also several quarter-point rate hikes below the mid-point estimate of 3 per cent.But markets, especially after the recent selloff, were
focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes."If there has been one
certainty of late it is the market's ability to misinterpret Fed Chairman Powell
This was again on display today," RBC Capital Markets chief US economist Tom Porcelli wrote in a note.Although a December rate hike has been
widely expected, the Fed's path next year has been more uncertain, with investors last month expecting two or even three rate hikes in
2019.The Fed fund futures contract expiring in January 2020, a heavily traded contract that reflects market expectations for where rates
will be at the end of 2019, rallied sharply on record volume and pointed to an implied yield of 2.70 per cent
It was 2.95 per cent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.Stock
markets began a broad descent towards a correction - a decline from the most recent peak of at least 10 per cent - in early October, just
after Powell had sounded a quite confident tone on the economy
Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.Just on Tuesday,
Fed Vice Chair Richard Clarida, in a speech to many of the same economists and investors in New York, used precisely the same language to
describe the policy rate as "just below" the range for neutral.Neither Clarida nor Powell said definitively whether rate hikes should stop
at neutral, and each stressed that level was very difficult to estimate
Fed forecasts from September showed policymakers expected to raise rates a bit above 3 per cent by around 2020, according to the median.On
Wednesday, 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.The Fed takes equally seriously the risks of hiking too quickly and shortening the
for the headline, this story has not been edited by TheIndianSubcontinent staff and is published from a syndicated feed.)
