Markets may have misread Powell speech, analysts say

Was Post Fed Chair Speech Rally a Market Overreaction

Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez

"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 in a speech on Wednesday. From the Fed's perspective, the interest rate hike in December will probably lead to an interest rate level that will no longer justify the automatism of a quarterly interest rate hike.

"Powell is not suggesting that since they are just below the range they may stop soon".

Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates. "There is no preset policy path, " the Fed chief said.

Factually, Mr Powell's remarks on Wednesday and in October are both true.

The minutes also revealed that Fed officials talked about modifying language in their policy statement, which now states that it expects "further gradual increases" in interest rates. That sets the ideal environment for the Fed to continue its slow increase of borrowing rates.

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.

On Wednesday, Powell also emphasised these uncertainties. "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.

Kashkari said he was "more worried" about that the Fed raises rates "prematurely" when the job market "has slack" and the wage growth hasn't picked up yet.

An expected December rate increase was further cemented into place.

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

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Still, Mr. Powell's observation appeared to soothe anxious investors.

On Thursday, the Fed's Open Market Committee published the minutes of a meeting in early November.

Investors say a sustained market rally following the summit would hinge on there being substantive concessions from Trump, in particular whether Xi can persuade Trump to postpone a sharp tariff hike on Chinese goods due to take effect January 1.

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

"Many baby boomers like me are, however, reaching an age where a good report is, 'Well, there are a number of things we should keep an eye on, but, all things considered, you are in good health, '" he said.

The Fed's current pattern of raising rates gradually - roughly once a quarter over the past two years - is an effort to balance two risks. And Powell's own communications plans to end each meeting with a news conference starting next year mean he needs a clear message for each meeting, starting next month.

"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".

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

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.

Compared with his recent predecessors, Mr. Powell, who became Fed chairman in February, has more regularly noted that the past few expansions ended with bursting financial bubbles rather than surging inflation.

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