WASHINGTON (AFP) - Economists and investors have been scratching their heads this week over signals from the Federal Reserve, which left the future of US monetary policy open to broadly divergent interpretations.
In remarks delivered on Wednesday in New York, Fed chairman Jerome Powell uttered words that set Wall Street on fire.
Claiming that benchmark lending rates were "just below" a range of estimates for "neutral," that is, neither stimulating nor slowing growth, Powell sent a signal that markets took to mean the Fed might ease off on raising rates in 2019.
Traditionally, stock markets love lower interest rates.
And as a result, Wall Street on Wednesday had its best day since March, with the Dow Jones Industrial Average rising 2.5 per cent and European equities lifted higher as well.
Minutes released on Thursday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly.
And Powell's words stood in stark contrast to his remarks of a month earlier, when he said rates were still "a long way" from neutral, perhaps suggesting the Fed actually had a lot more tightening to do.
Currently, the Federal Open Market Committee forecasts three quarter-point hikes for next year after a December increase, which is virtually guaranteed.
The neutral rate can seem like a central bankers' Holy Grail: the "Goldilocks" setting for monetary policy, neither so low as to allow excess inflation nor so high as to weigh on the economy.
Nevertheless, it is a tricky concept: economists put the range between 2.5 per cent and 3.5 per cent. The US federal funds rate range is now 2.0 - 2.5 per cent.
And some economists say the markets misread Powell.
Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish."
"Powell is not suggesting that since they are just below the range they may stop soon. All he is doing is pointing out an obvious idea," Porcelli wrote in a client note.
But Powell's most recent words should be taken along with other recent remarks in which he showed concern for the global economic outlook.
He said then that growth abroad was likely to weaken and that US fiscal stimulus, which had goosed consumption, would soon fade.
On Wednesday, Powell also emphasised these uncertainties.
"We also know that the economic effects of our gradual rate increases are uncertain and may take a year or more to be fully realised," he said, adding that there was "no preset policy path."
"We will be paying very close attention to what incoming economic and financial data are telling us."
According to Joseph LaVorgna, chief Americas economist at Natixis, "the Fed needs to stop raising rates."
"The neutral rate is an absurd concept. We already passed that, as the housing market shows," he said on CNBC, referring to this year's steady decline in home sales and construction - something analysts partly blame on higher mortgage rates.
Minutes released on Thursday from the Fed's Nov 7-8 policy meeting showed disagreements about the path of interest rates, with some policymakers worrying that tightening too fast could stem economic growth.
But Fed members agreed they would offer fewer signals about the future in their public statements, insisting, as Powell did this week, that they would instead monitor economic data and respond accordingly.
October inflation figures published on Thursday showed upward price pressures right at the Fed's two per cent target while consumers continued to spend at a brisk pace.
The rate hike likely coming on December 19 would raise the benchmark lending rate, which influences borrowing costs throughout the wider economy, to 2.5 per cent.
But from there, paths diverge. Oxford Economics now predicts a single increase in 2019 while JP Morgan and Goldman Sachs see four.
And any signs of an increase continued to be met by vituperation from US President Donald Trump, who has denounced the current tightening cycle at the Fed, which Congress made independent of the White House.