Fed Chief's Remarks On Economy And Interest Rates Cheer Investors

Randal Sanchez
December 5, 2018

Federal Reserve Chairman Jerome Powell speaks at the Economic Club of New York's luncheon in New York November 28, 2018.

Powell said in a speech in NY that interest rates remained "low by historical standards" and still provided stimulus to the economy. The benchmark fed funds rate, at 2.00-2.25 percent, is within a quarter of a percentage point of the bottom of the Fed's estimated range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 percent. "From a financial stability perspective; however, today we do not see unsafe excesses in the stock market".

In an appearance earlier this month, Powell cited strong annual economic growth above 3 percent and unemployment at a near five-decade low of 3.7 percent. However, it did signal a potential shift in tone about the pace of future rate hikes.

Trump on Tuesday again blasted his hand-picked chief of the U.S. central bank, saying he was "not even a little bit happy" with his selection of Powell.

"We also know that the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized", he said.

The neutral rate can seem like a central bankers' Holy Grail: The "Goldilocks" setting for monetary policy, neither so low as to allow excess inflation nor so high as to weigh on the economy. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.

As a result, "almost all" Fed members said a rate hike "was likely to be warranted soon". Investors have overreacted to relatively nuanced comments from Mr Powell in the past, and it is possible some misread his comments by believing he was telegraphing an end to interest rate increases.

In recent weeks, Fed officials have taken care to soften that outlook as certain pockets of the US economy signaled weakness.

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On Tuesday the president told the Washington Post blames the Fed for recent declines in the stock market and General Motors' plans to close two plants in the US.

Rieder's comments come ahead of Fed Chairman Jerome Powell's address to The Economic Club of NY around noon ET on Wednesday. There was also concern that they could cause the economy to slow down excessively.

Trump has repeatedly attacked Powell for continuing to raise the benchmark lending rate, which he says undermines the work he is doing to juice the United States economy.

Next month's expected quarter-point increase would lift the central bank's target for the federal funds rate to a range of 2.25 percent to 2.5 percent. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation.

"There is a great deal to like about this outlook", Mr. Powell said.

Powell's comments sparked a surge in a stock market that had struggled of late and came in the wake of repeated criticism of the Fed's rate increases by President Donald Trump.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral. Trump tapped Powell a year ago to be Fed chairman after he decided against giving Janet Yellen a second term. Bloomberg Economics anticipates three increases.

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