Stocks markets surge on hint of slower rate hikes

Gladys Abbott
November 29, 2018

The speech, widely considered the most important of the year and of Powell's career, follows months of blistering criticism of Powell and his monetary policy.

Powell, in a speech in NY on Wednesday, said interest rates appear to be just below the level the Fed calls "neutral", where they neither stimulate growth nor impede it. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 percent annual price increases.

And he repeated the view that the Fed's policy rate - at 2.25 percent - is "just below" the estimate of neutral, a rate that neither stimulates nor restrains the economy. Those remarks sent stocks down as investors bet the Fed would need more rate hikes to prevent the economy from overheating. Earlier this month that contract's implied yield was a full quarter point higher at 2.95 percent, indicating that investors have now cut a full Fed rate hike from their expectations for the central bank's policy trajectory.

In July, Trump said he was "not thrilled" with the interest rate hikes because they threatened to nullify the the economic stimulus his administration has tried to implement through actions such slashing the corporate tax rate from 35 percent to 21 percent, according to Yahoo Finance.

Focus now turns to the release this session of the October U.S PCE price index, the Fed's favoured inflation gauge, for more clues on the outlook for US interest rates. The higher the interest rate, the greater the cost to pay off credit.

USA central bankers are trying to keep the world's largest economy on an even keel and inflation near their 2 per cent target amid a strong labour market that has driven unemployment to the lowest level since 1969. "If it sells off enough, the Fed will blink", Bianco told Cheddar Wednesday.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump told the Post.

"I'm not happy with the Fed".

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"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce".

Trump claimed the Fed is "way off-base with what they're doing", in raising interest rates that were at historical lows following the financial meltdown that started in 2007.

Asked about GM's layoffs and recent declines on Wall Street, Trump laid the blame on Powell.

In his speech, Powell also explained the Fed's inaugural report on the stability of the U.S. financial system, released earlier Wednesday.

While he acknowledged the growing concern over increased borrowing by businesses that already carried a high debt load, he said that for now they were "unlikely to pose a threat to the safety and soundness" of the system in the event of a downturn.

For his part, Bianco also said anxiety aside, old sources of risk ー like the banking system, the credit markets, the mortgage markets, or too much leverage ー won't cause the next financial crisis. "We would have to look where we aren't looking", he said.

Meanwhile "the unsettled state of trade negotiations, Brexit negotiations, budget discussions between Italy and the European Union, and cyber-related disruptions" all remain risks to the global economy.

While Powell said Fed officials are monitoring these risks, they are not on the whole too anxious about them.

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