Shares pick up after Powell says US interest rates move closer to "neutrality"

The chairman of the Federal Reserve said US interest rates are approaching "neutral" levels, leaving stock markets as the best day of their careers since March, as investors have interpreted these words as a sign that the central bank is preparing to slow down its rate hike program.

While defending the Fed's recent gradual rate hikes, Jay Powell said the central bank would monitor new economic data as monetary policy makers decide what to do.

The rates oscillate "just below" neutral estimates – the level that causes no slowing of growth – said the Fed chairman, a possible sign that policymakers might decide not to raise them further.

"There is no predefined political path," Powell said. "We will pay close attention to what the incoming economic and financial data tell us."

The comments at the New York Economic Club on Wednesday appeared as he was facing increasing pressure from the White House to prevent further rate hikes. President Donald Trump told the Washington Post this week that the Fed, which is expected to raise rates next month for the fourth time this year, "is far from what it is doing."

My FOMC colleagues and I, as well as many private sector economists, expect strong and continuous growth, low unemployment, and near 2% inflation.

Mr. Trump added, "Up to now, I'm not even a little happy with my selection of Jay."

Markets reacted strongly to Powell's remarks, which contrasted with an assessment last month. In early October, he said the rates were far removed from neutral levels, causing a selloff as investors feared the Fed would prepare for a long succession of rate hikes.

The S & P 500 edged up 2.3% on Wednesday, its best day in eight months, after jumping one percentage point after Powell's speech. The Dow Jones Industrial Average rose by 2.5% and the Nasdaq Composite by 2.9%.

There was also a sharp weakening of the US dollar after the speech, while government bonds turned. By the end of the afternoon in New York, the benchmark 10-year US Treasury yield was stable at 3.059%, but the return on the two-year, more policy-sensitive note fell by 2 percentage points. basis at 2.813%.

In his speech, Mr. Powell did not directly mention Mr. Trump's criticism. But he insisted that the Fed was right to proceed with gradual rate hikes after judging that the economy was better served by the extremely low rates that prevailed after the financial crisis hit. 2008.

"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 – that is, say, no acceleration or slowdown in growth, "said Powell. "My FOMC colleagues and I, as well as many private sector economists, expect continued solid and strong growth, low unemployment and near 2% inflation."

The gradual pace of Fed rate hikes was an exercise in balancing two risks, Powell added.

"Going too fast could shorten the expansion," he said. "We also know that if we act too slowly, keeping interest rates too low, we risk creating further distortions in the form of higher inflation or destabilizing financial imbalances."

The speech was delivered after the release of the Fed's new Financial Stability Report. He stated that the overall indebtedness of the financial system was not "abnormal or excessive". Even though some asset valuations were high, the Fed did not find any "dangerous excess" in the stock market.

The Fed chairman also presented an optimistic view of financial market risks, saying that while policymakers were closely monitoring areas such as growing corporate indebtedness, the system as a whole was resilient. The latest financial health checks from the Fed suggest that "everything is considered healthy," Powell said.

Business loans were the main issue of concern, with the highest borrowing and the most penalized in terms of interest rates increasing their borrowings, and the quality of loan underwriting deteriorating. .