US Federal Reserve Chairman Jerome H. Powell said on Wednesday that the central bank could be on the cusp of slowing the pace of its recent interest rate hikes, saying rates are now slightly below what he considers to be a "neutral" level.
His comments marked a dramatic change from his position last month, when he said the Fed still had a "long way to go" before reaching that balance.
Powell's remarks skyrocketed on the US stock markets, as it seemed to indicate that the Fed would not make an aggressive move to raise rates much further than it has already done. The Dow Jones industrial average gained 500 points, an increase of nearly 2%, which wiped out its losses in November and returned to positive territory for 2018.
Nevertheless, arguing that rates were slightly below the level he sees as "neutral," Powell's statement seems to suggest that at least one further interest rate hike is imminent.
Powell's comments did not seem to accept President Trump's recent arguments that past increases in interest rates had been a mistake.
"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, say, no acceleration or slowdown in growth, "Powell told the Economic Club of New York.
Powell said his colleagues at the Fed and many other economists "expect solid and continuous growth, low unemployment and inflation close to 2%."
The Fed has already raised a key rate three times this year and should raise it again next month.
Powell did everything in his power to defend the Fed's recent measures and said that "there is no predefined political path.
"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 if we act too slowly, keeping interest rates too low for a long time, we risk further distortions in the form of higher inflation or destabilizing financial imbalances. Our gradual increase trajectory has been designed to balance these two risks, which must be taken 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 very unusual for a president to criticize the Fed, which is supposed to operate independently of politics.
"I'm not happy with the Fed," Trump told the Washington Post on Tuesday. "They make a mistake because I have an instinct and that my intestine tells me more sometimes than someone else 's brain can ever tell me.
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 explained that the Fed's cautious approach to raising interest rates related to staying in a room filled with furniture when the lights go out, then proceeding with caution to avoid bumping.
The Federal Reserve is the central bank of the US government, charged with maximizing employment and stabilizing prices. By controlling interest rates, it aims to prevent the overheating of the economy so as eventually to 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.
Investors have noted Powell's change of tone from previous statements and, beyond the Dow, other indices have also surged.
"Hip, hip, hurray," said Nancy Tengler of Heartland Financial. "In October, Powell said we were far from neutral. Now, he says we are close. It's a big change of tone. "
Powell's nuanced commentary eased investors' concerns about 2019. Investors feared that too many rate increases at too rapid a rate would increase the cost of borrowing, mortgages, mortgages and loans. car loans.
"They will raise rates in December. The market knows it. But investors were worried for 2019. Now, the Fed should not raise its 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 price growth has "slowed down" in recent weeks, the Fed should pause to better assess what is happening in the country. 39; 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.
"An escalation of trade tensions, geopolitical uncertainty or other adverse shocks could lead to a decline in investor appetite for risks in general," says the Fed's report. "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 markets most likely to be affected" by Brexit, while the conservative government led by British Prime Minister Theresa May insists that Britain 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 companies as a percentage of GDP 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 UK economy suffers from Brexit uncertainty and Europe is staggering. There has also been a slowdown in China, "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 the gap in 2008. Insurance companies are also in a more secure position than before the financial crisis of 2008. crisis, according to the report.
Jeff Stein contributed to this report.