Feds Powell, in dovish shift, says rates near neutral

Feds Powell, in dovish shift, says rates near neutral

FED WATCH: In a speech in New York, Powell said rates are close to neutral, the level at which they neither hold back growth nor aid it. Powell appeared to suggest the Fed might pause its interest rate increases next year to assess the effects.

The rate increases have gradually raised borrowing costs for consumers and businesses.

The fed fund futures contract expiring in January 2020, a heavily traded contract that reflects market expectations for where rates will be at the end of 2019, rallied sharply on record volume.

Trump directly criticized Powell, whom he appointed as Fed chairman.

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.

Trump argued that the Fed's policies were damaging the economy and pointed to the recent stock market declines and General Motors' announcement Monday that it would cut up to 14,000 workers in North America and put five plants up for possible closure.

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

Mr Powell's comments appear to implicitly reject arguments from President Trump that past interest rate rises have been a mistake. The law creating the Fed says such officials can be "removed for cause".

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Will Powell be able to earn enough extra credit with Wall Street to boost his grade?

"There is a great deal to like about this outlook", Mr. Powell said. He tried to dismiss as premature questions over whether the Fed would need to raise rates above neutral to a level aimed at slowing growth. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY.

Some members noted the further appreciation of the USA greenback could also pose as a downside risk to the economy.

This week, a speech by Jerome Powell, the chairman of the US Federal Reserve, triggered strong price swings in financial markets. "The market is putting too much weigh on the dovish arguments here; I don't think that is what he meant to signal". President Donald Trump stepped up attacks on Powell for rate hikes Trump sees as undercutting his economic and trade policies, telling the Washington Post just yesterday that he is "not even a little bit happy" with the Fed chief. Bloomberg Economics anticipates three increases.

In October 2015, when the Yellen Fed was navigating the hard transition from years of super-low interest rates to a cycle of rate hikes, she got the worst grade of her tenure - an average 2.27 out of 5.

"It removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", said Roberto Perli, an analyst at Cornerstone Macro, in a report Wednesday.

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