Fed Powell, disagrees, says rates are almost neutral

NEW YORK (Reuters) – US Federal Reserve Chairman Jerome Powell announced on Wednesday that the US central bank was about to halt its interest rate hikes. the Fed was now "just below" a level that neither slows nor increases healthy economy.

Stocks and interest rate futures jumped in response. The comments were a reversal from the beginning of last month, when Powell had said rates were probably still "far away" from a so-called neutral level and that the Fed could even go beyond that level. These remarks have brought down stocks, investors betting that the Fed would need more rate hikes to prevent overheating of the economy.

Powell's dovish change came when US President Donald Trump stepped up attacks on Powell to raise rates, undermining Trump's economic and trade policies, telling the Washington Post that he did not even feel comfortable a little happy the head of the Fed. .

Powell "gave exactly what he wanted to the market, and presumably to President Trump, which was an admission that the trajectory of the previously proposed rate hikes was probably too aggressive and slowed down. the pace of increases, "said Oliver Pursche, vice president chief markets officer at Bruderman Asset Management in New York.

The Fed has moved into a quarterly rate hike cycle and is expected to tighten its policy next month. However, the signs of a slowdown abroad and almost two months of market volatility – including a strong sell last week – have cast a gloomy American picture, in which the economy far exceeds potential and unemployment is at its lowest since the 1960s.

Powell said the Fed is paying "very close" attention to economic data, even if it predicts "solid" growth, low unemployment and inflation close to its target of 2%.

The Fed takes equally seriously the risks of a too rapid rise and a reduction in economic expansion, and on the other hand a too slow rise and fallout. 39, an increase in inflation or financial instability, he said.

"We know that forecasts often turn out to be very different from the most cautious forecasts," Powell said at a luncheon hosted by the New York Economic Club. "Our gradual rate of increase in interest rates has been a balancing act of risk."

In fact, Powell's remarks on Wednesday and October are both true. The benchmark federal funds rate, between 2.00 and 2.25%, is a quarter of a percentage point lower than the Fed's estimated range for neutrality, but also several quarter of a point below the median estimate of 3%.

However, the markets were less focused on these subtleties than on what Powell had estimated when rates were means for the future trajectory of rate hikes.

The federal funds futures contract maturing in January 2020, a highly negotiated contract that reflects market expectations of rate setting at the end of 2019, has risen sharply thanks to a record volume.

The price of the contract had increased by a maximum of 4.5 basis points since early September and had an implied yield of 2.70%. Earlier this month, the implied yield of this contract was 2.95% higher at the peak of a full quarter, indicating that investors have now significantly reduced the Fed's rate hike over their expectations regarding the trajectory of the central bank.