Markets

USA stocks turn higher on Fed minutes; dollar recovers slightly

USA stocks turn higher on Fed minutes; dollar recovers slightly

Powell said on Wednesday that USA interest rates were "just below" neutral, less than two months after saying rates were probably "a long way" from that point.

The change comes months after Powell indicated plans to raise interest rates and cool down the USA economy, moves that run counter to President Donald Trump's expansionary moves, including last year's tax cuts.

His speech to the Economic Club of NY sent markets soaring more than 600 points on Wednesday.

The current Federal Fund rate is 2.25 per cent, and there is a 77 per cent probability of a 25-basis point increase in the December meeting scheduled in the week before Christmas.

"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said.

"Neutral" means the rate neither stimulates nor drags on economic growth.

Jerome Powell has said the Fed's key rate is "just below" neutral.

Some market analysts treated such remarks as an indication of a possible pause in rate hikes, since the neutral rate could be used to decide a target area for the central bank to complete its normalization cycle. Rather, we assume that Powell wanted to prepare the markets for a change in the central bank's communication.




Federal Reserve officials signalled they're adopting a more flexible approach in their gradual interest-rate increases after a likely December hike, as they try to sustain a USA expansion that may become the longest on record next year.

"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell".

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 2.7 per cent.

"Powell is not suggesting that since they are just below the range they may stop soon. I think that's what we've been doing".

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added. Home sales, vehicle sales, business investment and other parts of the economy that are sensitive to interest rates have begun to soften, evidence that the Fed's eight rate increases since 2015 are changing household and business behaviour. It slowly began to raise them again in 2015 as the economy regained strength under Obama, and it has raised rates six times since Trump took office.

Policy makers provisionally penciled in three quarter-percentage-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon on Wednesday.

With last year's deep tax cuts and fiscal stimulus from Congress, the world's largest economy continues to hum: producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed's two percent target. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.


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