Published: Fri, November 30, 2018
Markets | By Otis Pena

Fed's Powell, in apparent dovish shift, says rates near neutral

Fed's Powell, in apparent dovish shift, says rates near neutral

A stock market analyst said Wednesday on "Your World" that the Federal Reserve appeared to "do a 180" and stopped dramatically hiking federal interest rates because President Trump "got in" Fed Chairman Jerome Powell's head.

In an interview with the Washington Post earlier this week, Trump blamed the Fed for recent stock market declines and General Motors's announcement of plant closures and layoffs.

After Powell's Wednesday remarks, the market soared to a more-than 600 point gain on the day.

Rates "are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy", he added.

And as a result, Wall Street on Wednesday had its best day since March, with the Dow Jones Industrial Average rising 2.5 per cent and European equities lifted higher as well. At 10.03 am, the rupee was trading at 69.95 against the greenback, up 0.93 per cent.

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 and pointed to an implied yield of 2.70 percent. That comment had unsettled investors who feared that it meant the Fed would need a number of further hikes to get to neutral.

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And Mr Powell's words stood in stark contrast to his remarks of a month earlier, when he said rates were still "a long way" from neutral, perhaps suggesting the Fed actually had a lot more tightening to do. "By contrast, interest rate control might be hard to achieve in an operating regime of limited excess reserves".

"We will be paying very close attention to what incoming economic and financial data are telling us".

Although a December rate hike has been widely expected, the Fed's path next year has been more uncertain, with investors last month expecting two or even three rate hikes in 2019.

Moving forward, investors will now turn their attention to the release of minutes from the USA central bank's November meeting in order to obtain further clues on the Fed's monetary tightening path.

"As always, our decisions on monetary policy will be created to keep the economy on track in light of the changing outlook for jobs and inflation", Powell said.

The Fed still sees the economic outlook as relatively strong. Rather, he said, the Fed will assess the most recent economic and financial data in deciding whether or how fast to keep raising rates.

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