Fed's grades slip in Wall Street's latest report card

03 December, 2018, 04:31 | Author: Corey Lynch
  • Wall Street rallies after Powell says policy rate near neutral

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

To that end, Trump, who chose Powell to replace former Fed chief Janet Yellen, has often bashed him and the Fed on Twitter and in interviews for the rate hikes.

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.

The Fed has settled into a quarterly rate-hike cycle and is expected to tighten policy again next month.

Investors expect more clues on the Fed's monetary tightening path from the minutes of the USA central bank's November 7-8 meeting, due later on Thursday. "I am pleased to say that our economy is now close to both of those objectives", Powell said in an appearance at the Economic Club of NY.

"Our gradual pace of raising interest rates has been an exercise in balancing risks", Mr Powell said.

The reason for this was a formulation that the current key interest rate was just below the broad range of estimates for the neutral interest rate.

Mr. Powell's October remark came during an unscripted moment at a moderated discussion in Washington. On Wednesday he referenced a range, and in October he likely referenced a median. Equity investors leapt to the same conclusion on Powell's speech, with the S&P 500 ending the day up more than 2 percent. Instead, officials suggested incorporating wording to emphasize a greater dependence on incoming data to govern future rate hikes.

Trump tapped Powell previous year to be Fed chairman after he decided against giving Janet Yellen a second term.

Nevertheless, the dovish interpretation of Powell's comments was traded across financial markets on Wednesday.

Some policymakers agreed with the idea of further rate increases, but also "expressed uncertainty about the timing". According to CME Group's FedWatch tool, the probability of a December rate hike rose today, while it declined for the meeting in March 2019.

The Federal Reserve has hiked rates three times this year, which has drawn the ire of U.S. President Donald Trump who has lambasted the Fed whenever the markets experience significant downturns.

Gold prices held firm on Thursday after notching up their biggest daily percentage gain in almost two weeks in the previous session, with the dollar easing on dovish comments from Federal Reserve Chair Jerome Powell. Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.

A "significant fall" in asset prices would make it more costly for nonfinancial businesses, which are already highly leveraged, to obtain funding, the Fed cautioned.

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

Matthew Cheslock, a trader at Virtu Financial, told CNNMoney editor-at-large Richard Quest on "Markets Now" Wednesday that the market interpreted Powell's comments as meaning that we are "closer to normal rates".



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