Federal Reserve Chairman's Magic Words Spur Stock Market Surge

Andrew Cummings
December 2, 2018

The minutes showed a couple of participants felt the benchmark fed 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".

Its removal would flag a possible pause in roughly quarterly hikes that had been expected to continue through 2019, without committing the central bank to moving or not moving at any particular meeting.

Analysts think a rate hike next month is all but certain, possibly in part because they think the Fed doesn't want to appear to be bowing to pressure from Trump.

Powell offered few clues on how much longer the USA central bank would raise interest rates in the face of a slowdown overseas and market volatility at home.

The Post said he blamed the Fed for the recent stock market sell-off and General Motors' plans to close plants and cut more than 14,000 jobs.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon on Wednesday. But he said the Fed's gradual increases balanced the risks between raising too much and not enough.

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. The S&P 500 rose 61.61 points, or 2.30 percent, to 2,743.78.

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. Daco said Powell's comments - coupled with comments from Fed vice chair Richard Clarida on Tuesday - show a "growing desire by the Fed to move the landing zone for the federal funds rate, and signal less cumulative tightening ahead".

Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish".

This gap, which measures expectations on rate increases in the next year, has narrowed to 23 basis points, indicating that traders are not penciling in more than one increase in 2019, although the Fed's median projections still point to three increases next year. But signs of a slowdown overseas and almost two months of market volatility - including a sharp sell-off in equities last week - have clouded an otherwise rosy picture of the US economy. "If you follow the dot plots as consensus, there should be two more hikes next year, though that is not guaranteed and will be data dependent", said Michael DePalma, chief executive, PhaseCapital LP. Salesforce.com surged 10.3 per cent. Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.

In the question period after his speech Wednesday, Powell sidestepped an inquiry about whether the next recession would likely caused by instability in the financial sector, such as a sharp drop in stock prices triggered by rising rates.

And Powell repeated the view that the current level - at 2.25% - is "just below" the estimate of neutral, a rate that neither stimulates nor restrains the economy.

The Fed raised its benchmark rate in March, June and in September, with the last increase putting it in a range of 2 percent to 2.25 percent. "We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilizing financial imbalances".

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