Federal Reserve Chairman's Magic Words Spur Stock Market Surge

Federal Reserve Chairman's Magic Words Spur Stock Market Surge

United States stocks extended gains after the Federal Reserve chair Jerome Powell said rates are "just below" the range of a neutral policy, in a highly anticipated speech on Wednesday.

Wall Street rallied, with the Dow Jones equity index gaining 2.5pc, as investors bet the Fed was about to ease back on its programme of rate rises.

Powell, in remarks just two weeks ago, had listed three possible challenges to growth in 2019: slowing demand overseas, fading fiscal stimulus at home and the lagged economic impact of the Fed's past rate increases.

With estimates of a "neutral" rate in the range of 2.5-3.5 percent, the Fed is "only one hike away from the bottom end of the range but it remains three hikes from the middle of the range", Shepherdson said in a research note.

The Federal Reserve chairman has presided over three interest rate increases this year and is widely expected to hike again in December.

"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell", said Tom Porcelli, chief USA economist at RBC Capital Markets. He added that the Fed regards no major asset class as significantly inflated, "as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom".

US President Donald Trump has repeatedly attacked Powell for raising the benchmark lending rate but the Fed chief and other officials say the attacks have no influence on the deliberations of the independent central bank (AFP

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.

"It's important to distinguish between financial market volatility and events that threaten financial stability", he said.

Some have speculated that Trump might try to oust Powell, who was his hand-picked choice to lead the Fed. The current system relies on the Fed paying interest on some reserves to set the federal funds rate.

But Powell also noted a number of looming risks, including the slowdown in global growth and the fading economic benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed's own rate hikes. While that issue has never arisen in regard to a Fed official, the courts ruled decades ago that "for cause" meant more than a policy disagreement with the president. I'm doing deals and I'm not being accommodated by the Fed. In the question-and-answer period following his speech, the Fed chairman agreed with the consensus view that monetary policy's goals should remain focused on low unemployment and stable inflation rather than targeting financial markets such as stocks. Investors have been bracing for higher interest rates in the face of possible inflation stemming in part from Trump's trade wars as well as the tax cuts he pushed through Congress late a year ago.

While campaigning for president in 2016, Trump had been critical of the Yellen Fed, contending that under her, the central bank was keeping rates abnormally low to try to help Democrats. The December 2019 contract has effectively removed a full quarter-percentage-point Fed hike by that time.

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