Published: Sun, December 02, 2018
Finance | By Loren Pratt

Wall Street rallies as Fed sees interest rate 'just below' neutral

Wall Street rallies as Fed sees interest rate 'just below' neutral

The chairman has repeatedly asserted the Fed's independence, and there was no sign that Wednesday's suggestion the central bank may slow the pace of rate hikes is related to Mr Trump's criticisms.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases, and consumer and business sentiment worsens in early 2019.

Speaking to the Economic Club of NY, the chairman also suggested that interest rates appear to be just below the level the Fed calls "neutral", where they are thought to neither stimulate growth nor impede it.

Federal Reserve Chairman Jerome Powell ignited a market rally Wednesday by saying interest rates are "just below" broad estimates of a level considered neutral, a setting created to neither speed nor slow economic growth.

The Fed has raised its benchmark short-term rate, now in a range of 2 per cent to 2.25 per cent, three times this year and is expected to do so again next month. But he said the Fed's gradual increases balanced the risks between raising too much and not enough.

Most of the money from the tax cuts has been devoted to finance share buybacks, further boosting the wealth of the financial oligarchy, not to undertake expansion in the real economy.

In what was seen as a shift in tone from remarks last month, Mr Powell on Wednesday said the Fed's series of rate increases had brought policy to "just below" the range of estimates of neutral, where it neither spurs nor restricts the economy.

U.S. Federal Reserve (Fed) said on Thursday that nearly all Fed policymakers expected another interest rate hike "likely to be warranted fairly soon". Powell said he and other policy makers continue to see a "solid" outlook for the US economy, while noting that interest rates are "just below" the so-called neutral range. His remarks Wednesday appeared to suggest to this audience that he might stop sooner or move more slowly.

As for future hikes, some expressed uncertainty about the timing. While interest rates were gradually moving to a neutral point, "we're a long way from neutral at this point, probably".


"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and worldwide financial markets and strains in institutions", according to the Fed report.

On Wednesday Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment and inflation near its 2 percent target.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes.

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed. The Fed's benchmark federal-funds rate since then has been between 2% and 2.25% - or just below the lowest estimate.

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

"What do you do?" said Powell in NY.

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

The continued strength of the American economy has made it more likely that the Fed will stick to its plans to raise rates in December, as part of its strategy to keep growth on an even keel into 2019.

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