WASHINGTON – US Federal Reserve Chairman Jerome Powell said on Wednesday that the central bank could slow down the pace of its interest rate hikes, a statement hailed by investors worried about the strength of the stock market. global economy and the gloomy markets.
His comments seemed to mark a change from his position last month, when he said the Fed still had a "way to go" before reaching what economists consider an appropriate level.
The description of Powell's central bank approach has rocketed the stock market, as investors look forward to any sign that the Fed is preparing to suspend its slow but steady efforts to raise interest rates. interest. The Dow Jones Industrial Average rose 618 points to 25,366 points, an increase of 2.5%, wiping out its losses in November and returning them to positive territory for 2018. The stock index Standard & Poor's 500 climbed 2.3%. the Nasdaq composite index, which is very technology-driven, rose 3%.
Powell's speeches to the New York Economic Club come a day after President Donald Trump founded the Powell case – which he had named last year – for his management of the central bank. In an interview with the Washington Post, Trump said the Fed was "a much bigger problem than China", complaining to take action to withdraw stimulus measures from the economy – the latest in date 39, a wave of virulent criticism that Trump has expressed himself to the presidency of the Fed.
Fed officials say they act independently of the policy and nothing indicates that Powell made his comments in response to Trump's attacks. However, these remarks could nevertheless allay the concerns of Fed critics, such as Trump, who blame the central bank for taking too strong action to slow economic growth.
The Fed had reduced its rates to zero after the 2008 financial crisis; it has maintained them and has taken other measures to strengthen the economy after the most severe recession since the 1930s. Since December 2015, it has reversed its efforts to avoid inflation and other risks associated with an economy in crisis.
Trump and others hoping that the Fed would immediately stop raising rates may be disappointed. Investors have already overreacted to Powell's comments, and the Fed should still raise rates in December and perhaps again next year.
"Interest rates are still low by historical standards and they stay just below the wide range of estimates of the level that would be neutral for the economy, ie, no acceleration or slowdown in the economy. growth, "Powell told the Economic Club of New York.
According to the Fed, the long-term interest rate of the economy is expected to be around 3%. The Fed keeps its rates between 2 and 2.25%. It influences the economy by manipulating the federal funds rate, which serves as a benchmark for lending by many institutions.
Powell's remarks are indicative of a difficult balance point that he is looking for in his management of the economy. The increase in interest rates increases the cost of borrowing and increases the cost of credit for households and businesses. An excessive rise in these could trigger a recession. But if the Fed did not act, it could let the economy overheat in a way that would lead to a possible recession.
Although he did not mention Trump 's name, Powell' s remarks seemed to strongly contradict the idea that the Fed was not calculating the economy well. Powell said his colleagues at the Fed and many other economists "expect solid and steady growth, low unemployment and inflation close to 2%."
He also said the central bank would continue to re-evaluate the strength of the economy by stating that "there is no pre-established political path" to the next step.
"Our progressive pace of interest rate increases has been a risk balancing exercise," Powell said. "We know that an action too fast could shorten the expansion.We also know that an action too slow – keeping interest rates too low for too long – could result in a risk." 39 Other distortions in the form of higher inflation or destabilizing financial imbalances Our gradual growth trajectory has been designed to balance these two risks, which we both must take seriously. "
Trump has unloaded a host of criticisms of Powell over the last few weeks, with the president accusing the head of the central bank of raising interest rates in one way. which, according to Trump, would have destabilized the stock market. It is unusual for a president to criticize the Fed, which is supposed to operate independently of politics.
"I'm not happy with the Fed," Trump said in an interview with The Post. "They make a mistake because I have an instinct and that my intestine tells me more sometimes that someone else 's brain can never tell me. "
The Fed is responsible for maximizing employment and stabilizing prices. By controlling interest rates, it aims to prevent too rapid economic growth and the creation of distorted prices in the stock market and elsewhere that eventually collapse and lead to a recession.
But it can be difficult to know when to raise interest rates and people often have different opinions about the room for maneuver that the Fed should expect.
In response to questions posed after his speech, Powell pointed to the recent volatility of stock markets, but said the Fed was primarily focused on slower pace trends, which say more about the health of the stock market. ;economy. He also described the Fed 's cautious approach to raising interest rates, which appeared to stay in a room filled with furniture when the lights went off. turn off, then proceed with caution to avoid bumping.
Investors have noted Powell's change of tone compared to previous statements.
"Hip, hip, hurray," said Nancy Tengler, chief investment officer at Heartland Financial. "In October, Powell said we were far from neutral, now he says we're close, it's a big change of tone."
Powell's nuanced comments eased investors' concerns about 2019. Investors feared that too many rate increases at too rapid a rate would increase the cost of borrowing, mortgages and loans. auto loans.
"They're going to raise their rates in December, the market is well aware, but investors were worried for 2019. Now, the Fed is looking to not raise rates as much in 2019," said Scott Wren of the Wells Fargo Investment Institute.
With inflation remaining relatively low, a number of people said the Fed should consider suspending its rate of rise in interest rates. Jason Furman, who was President Barack Obama's chief economic advisor, said on Wednesday that as price growth has "slowed down" in recent weeks, the Fed should pause to better gauge what is happening in the economy.
Powell's comments came the same day the Fed released a report highlighting the short-term risks of potential international shocks to the financial system, as well as long-term risks such as corporate debt. She said a number of risks, if poorly managed, could hurt the economy.
"Escalating trade tensions, geopolitical uncertainty or other adverse shocks could lead to a decline in investor appetite for risks in general," the Fed report said. "The resulting decline in asset prices could be particularly significant, as valuations appear to be high relative to historical levels."
Fed report says US banks and brokerage firms are "among the most likely markets to be affected" by Brexit, while conservative government led by British Prime Minister Theresa May is pushing for that his country leaves the European Union. This could have an impact on the entire US economy if the major US trading partner faced an economic downturn.
In addition, the total debt held by US firms as a share of gross domestic product is at a "historically high level", although this growth has slowed in the first half of this year. The report also points to a slowdown in the Chinese economy, which has recently experienced the slowest growth since 2009.
"The British economy is suffering from the uncertainty of Brexit and Europe is reversing some of it. China has also experienced a slowdown," said Allen Sinai, chief economist and strategist at Decision Economics. "The links are related to the US financial system that the Federal Reserve oversees, and these risks deserve to be reported."
But the report is also a source of comfort. The Fed's report notes that US banks are highly capitalized and well-prepared to absorb the kind of shocks on the financial system that plunged Wall Street into a free fall in 2008. Insurance companies are also in a more challenging position. sure before the financial crisis of 2008. crisis, according to the report.
Jeff Stein of the Washington Post contributed to this report.