By JONATHAN SPICER, ANN SAPHIR
Thursday, November 29, 2018
NEW YORK -- U.S. markets soared Wednesday after Federal Reserve chair Jerome Powell said the central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that analysts saw as an indication that the Fed's three-year tightening cycle is drawing to a close.
Stocks and interest-rate futures jumped, with the Dow Jones indexup 617 points - its biggest one-day increase in eight months. The S&P 500 rose 2.3 per cent and the Nasdaq gained 2.9 per cent after Mr. Powell's remarks at an Economic Club of New York luncheon.
On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a "long way" from a neutral level and that the Fed might even tighten policy beyond that level. Stocks swooned on those remarks as investors bet the U.S. central bank would need more rate hikes to prevent the economy from overheating. Mr. Powell's dovish shift in language came as U.S. President Donald Trump stepped up attacks on him for rate hikes that Mr.
Trump sees as undercutting his economic and trade policies, telling The Washington Post on Tuesday that he is "not even a little bit happy" with the Fed chief.
Mr. 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 New York.
The Fed has settled into a quarterly rate-hike cycle and is expected to tighten policy again next month. But signs of a slowdown overseas and nearly two months of market volatility - including a sharp selloff last week - have clouded an otherwise mostly rosy U.S. picture in which the economy is expanding well above potential and unemployment is the lowest since the 1960s.
Mr. 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-per-cent target.
The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, he said. "We know that things often turn out to be quite different from even the most careful forecasts," Mr. Powell said. "Our gradual pace of raising interest rates has been an exercise in balancing risks."
Factually, Mr. Powell's remarks on Wednesday and in October are both true. The benchmark fed funds rate, at 2 per cent to 2.25 per cent, is within a quarter of a percentage point of the bottom of the Fed's estimated range for neutral, but is also several quarter-point rate hikes less than the midpoint estimate of 3 per cent.
But markets were focused less on such subtleties than on what Mr. Powell's assessment of where rates are means for the future path of rate hikes. 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. The contract's price was last up 4.5 basis points to the highest since early September and carried an implied yield of 2.70 per cent. Earlier this month, that contract's implied yield was a full quarter point higher at 2.95 per cent, indicating that investors have now cut a full Fed rate hike from their expectations for the central bank's policy trajectory.