The chairman of the Federal Reserve announced that US interest rates are closing at “neutral” levels, causing a rally in the stock market, as investors interpreted the comments as a signal that the central bank was preparing to slow down its tariff increase program.
While he defended the recent phased rate hike by the Fed, Jay Powell said the central bank will keep a close eye on new economic data, as monetary policy makers decide what to do next.
Prices fluctuate "just below" neutral ratings – a level that does not accelerate growth or slow growth, said the Fed chairman in a possible sign that politicians may decide that they do not need to raise them much further.
“There is no predetermined political path,” said Mr. Powell. "We will pay very close attention to the fact that we are informed by the incoming economic and financial data."
Comments at the New York Economic Club on Wednesday came when he was faced with increased pressure from the White House to contain further growth rates. President Donald Trump told The Washington Post this week that rates are expected next month for the fourth time this year, "away from the base with what they are doing."
Mr. Trump added: “Until now, I’m not even a little happy with my choice of Jay.
The markets reacted strongly to Mr. Powell’s comments, which contrasted with the estimate he gave last month. In early October, he said that rates were a “long way” from neutral levels, causing a sell-off, as investors worried that the Fed was preparing for a long series of rate hikes.
The S & P 500 rose 1.6 percent in the afternoon in New York, jumping to a full percentage point after Mr. Powell’s speech. The Dow Jones Industrial Average increased its profits to 1.9%, while the Nasdaq Composite rose 1.9%.
Government bonds rallied as yields declined. Yield on the US 10-year benchmark treasury fell 0.7 basis points at 3.0498 percent, rising 1.1 bp before Mr. Powell said. Yield more sensitive to the policy of the two-year note decreased by 2.4 bp up to 2.8066%.
In his speech, Mr. Powell did not directly refer to the criticism of Mr. Trump. But he insisted that the Fed had the right to start a gradual increase in rates after judging that the economy was no longer served by the extremely low rates that prevailed after the 2008 financial crisis.
"Interest rates are still low by historical standards, and they remain just below a wide range of estimates of a level that would be neutral for the economy, that is, neither acceleration nor slower growth," said Mr. Powell. "My colleagues from the FOMC and I, like many economists from the private sector, predict long-term stable growth, low unemployment and inflation of about 2 percent."
The gradual growth rate of the Fed was one of the exercises for balancing the two risks, Mr. Powell added.
“Moving too quickly will lead to a reduction in expansion,” he said. “We also know that too slow progress — too low interest rates are too high — can risk other distortions in the form of higher inflation or destabilization of financial imbalances.”
The speech appeared after the release of the new report on the financial stability of the Fed. He said total debt in the financial system was not “abnormal or excessive.” Despite the fact that some asset valuations were high, the Fed does not see "dangerous excesses" in the stock market.
The Fed chairman also offered an optimistic view of financial risks in the market, saying that, although policymakers followed areas, including the growth of corporate debt, the overall system was sustainable. Recent Fed financial audits have shown that “everything is considered to be in good health,” Mr. Powell said.
The main area of concern was corporate lending, where firms with high debt and interest burdens increased their borrowing the most, and credit underwriting quality indicators deteriorated.