US stocks rally after Fed chief hints pace of rate hikes may slow

Federal Reserve chairman Jerome Powell.
Federal Reserve chairman Jerome Powell.

WASHINGTON • Federal Reserve chairman Jerome Powell has opened the door for a potential pullback in projected US interest rate hikes for 2019 following a widely expected increase in December.

In what was seen as a shift in tone from remarks last month, Mr Powell on Wednesday said the Fed's series of rate increases had brought policy to "just below" the range of estimates of neutral, where it neither spurs nor restricts the economy. Last month, Mr Powell said the Fed still had a "long way" to go before it reached that equilibrium.

His comments sparked a surge in a stock market that had struggled of late and came in the wake of criticism of the Fed's rate increases by President Donald Trump.

The Dow Jones Industrial Average rose 618 points to 25,366, a 2.5 per cent rise, in a surge that erased its November losses and put it back in positive territory for the year.

The broader Standard & Poor's 500-stock index climbed 2.3 per cent, and the tech-heavy Nasdaq rose 3 per cent.

Policymakers had provisionally pencilled in three quarter-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said.

Next month's expected quarter-point increase would lift the central bank's target for the federal funds rate to a range of 2.25 per cent to 2.5 per cent. That would bring it to about the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 per cent to 3.5 per cent.

By saying rates were slightly lower than the level he perceives as "neutral", Mr Powell's statement appears to be suggesting at least one more interest rate increase is coming in the near future.

Though Mr Powell's comments were markedly different from his characterisation of Fed policy last month, he left ample room for the central bank to continue raising rates, depending on the economy's performance. Investors have overreacted to relatively nuanced comments from Mr Powell in the past, and it is possible some misread his comments by believing he was telegraphing an end to interest rate increases. That is not what he said.

By saying rates were slightly lower than the level he perceives as "neutral", the Fed chief's statement appears to be suggesting at least one more interest rate increase is coming in the near future.

Mr Powell's comments appear to implicitly reject arguments from President Trump that past interest rate rises have been a mistake. The chairman has repeatedly asserted the Fed's independence, and there was no sign that Wednesday's suggestion the central bank may slow the pace of rate hikes is related to Mr Trump's criticisms.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy, that is, neither speeding up nor slowing down growth," Mr Powell told the Economic Club of New York.

The central bank chief said his colleagues and many other economists "are forecasting continued solid growth, low unemployment and inflation near 2 per cent".

He did not specifically cite the criticism he has faced from the White House, but he defended the Fed's recent moves and said "there is no preset policy path".

"Our gradual pace of raising interest rates has been an exercise in balancing risks," Mr Powell said. "We know that moving too fast would risk shortening the expansion. We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilising financial imbalances. Our path of gradual increases has been designed to balance these two risks."

Mr Powell's nuanced comments eased investor concerns about 2019. Investors had been worried that too many rate hikes at too fast a pace would raise the cost of borrowing across the board, from mortgages to car loans.

WASHINGTON POST, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on November 30, 2018, with the headline 'US stocks rally after Fed chief hints pace of rate hikes may slow'. Print Edition | Subscribe