Markets may have misread Powell speech, analysts say

Gladys Abbott
December 1, 2018

"Interest 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 - that is, neither speeding up nor slowing down growth", Powell said while speaking at the Economic Club of NY.

Powell was cited in the minutes as saying that "it might be appropriate to implement another technical adjustment in the IOER rate relative to the top of the target range for the federal funds rate fairly soon".

Minutes of the USA central bank's November 7-8 meeting showed "almost all participants" agreed that another rate hike would likely be necessary "fairly soon".

Minutes of the November 7-8 meeting of the Fed's rate-setting body, the Federal Open Markets Committee, show that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.

"There is no preset policy", he said.

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 percent target.

Factually, Mr Powell's remarks on Wednesday and in October are both true. Some listeners thought his tone conveyed greater conviction about continuing rate increases.

In remarks delivered two weeks ago on a late evening in Dallas, Powell refined his summertime message, explaining that just as someone in a room where the lights suddenly go out must "slow down" to avoid running into furniture, the Fed must do the same when nearing neutral to avoid missing signals from economic data.

According to Joseph LaVorgna, chief Americas economist at Natixis, "the Fed needs to stop raising rates". It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy. "The market, by pricing in just about 1 hike next year has implicitly a much weaker economic narrative baked in". He will have an opportunity to do that next week in testimony on Capitol Hill. That suggested to many investors that fewer rate increases might be on the way.

An expected December rate increase was further cemented into place.

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At the meeting this month, USA central bankers left the benchmark lending rate in a range of 2% to 2.25%.

Tim Duy, an economics professor at the University of OR who follows the Fed closely, said it was a sign the Fed was ready to wait to see how past hikes will play out. Powell, who took over as Fed chairman in February, has said he wants to provide the public with "plain English" descriptions of what the central bank is up to.

Mr. Powell repeated a relatively upbeat view of the economic outlook, including low unemployment and stable inflation.

"If Trump were able to get those additional concessions from China at this meeting, and announce certainly no trade deal, but. a commitment to further negotiations to work towards a deal and in the interim not see further escalation, then that's something markets would latch onto", Page added.

"We know that moving too fast would risk shortening the expansion", Mr. Powell said.

Hiking too forcefully before necessary could risk causing a recession in the US economy, he warned.

"You're no longer on a forced march to neutrality, " he said. "In addition, other measures of underwriting quality have deteriorated, and leverage multiples have moved up".

"His description highlights the significant uncertainty around estimates of neutral, a theme he mentioned at his speech at Jackson Hole in August", Jan Hatzius, chief U.S. economist for Goldman Sachs, wrote in a note to clients Wednesday.

"Several dealers noted that recent communication from Fed officials has been clear".

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