U.S. stocks surge after Fed chair's comments on interest rates

Dwayne Harmon
December 3, 2018

The Federal Reserve chairman, Jerome Powell, appeared to cautiously climb down on the central bank's interest rate policy on Wednesday after another assault on his tenure from Donald Trump.

Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell meant to send a message or was simply misunderstood.

His remarks were in stark contrast to comments he made in October when he said interest rates were a "long way" from a neutral level.

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.

Jerome Powell hinted he may end interest rate hikes, saying rates are now "just below" the level which would not impact a healthy economy. Speculation is growing over whether the Fed will change this policy at next month's meeting.

Speaking to the Economic Club of NY, the Fed chairman also said that while some corporate debt loads have reached riskier levels, "we do not see unsafe excesses in the stock market".

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.

In a speech that comes in the wake of another volatile market selloff, Powell offered few clues on how much longer the USA central bank would continue tightening policy but he did say the policy rate, at 2-2.25 percent, is now "just below" the broad range of estimates of neutral, which in September was 2.5-3.5 percent.

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Mr. Powell's October remark came during an unscripted moment at a moderated discussion in Washington.

Stocks were higher across the board with the Dow rising more than 600 points while the S&P 500, Nasdaq, and Russell 2000 all gained more than 2.3%.

Trump's blunt public criticism of the Fed is without precedent.

The possible policy shift occurred at a meeting at which the Fed also resumed debate on how best to manage short-term interest rates in the future, a decision that could influence the final target size of the Fed's still-massive balance sheet. Still, "this dovish Fed lean is a fantastic cure-all for what ails stock markets sentiment". It was 2.95 percent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.

Gold prices held firm on Thursday after notching up their biggest daily percentage gain in almost two weeks in the previous session, with the dollar easing on dovish comments from Federal Reserve Chair Jerome Powell. Powell and other Fed officials have since sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.

A "significant fall" in asset prices would make it more costly for nonfinancial businesses, which are already highly leveraged, to obtain funding, the Fed cautioned.

"Powell's comments suggest that 2019 may be more of a wait-and-see approach and the assumption of any hikes may be premature", said Tai Wong, head of metals trading at BMO. That would bring it to about the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 per cent to 3.5 per cent.

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