Published: Mon, December 03, 2018
Money | By Ethel Goodwin

Powell: US economy and banks seem sturdy but face some risks

Powell: US economy and banks seem sturdy but face some risks

Powell's comments may assuage concerns about the Fed possibly going too far with rate increases, a criticism leveled by President Donald Trump. He has more recently called the Fed "crazy" and "loco" over recent interest-rate increases.

Yields on shorter-dated US government bonds fell on Wednesday afternoon, steepening the yield curve, after Federal Reserve Chair Jerome Powell delivered a speech in which he signaled that an end to the bank's interest-rate hike cycle may be closer than previously suggested.

The Dow Jones Industrial Average surged more than 600 points, or 2.5%, to 25,366.43, while the broader S&P 500 index rose 2.28% to 2,743.43.

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.

Speaking to the Economic Club of New York Powell said interest rates were now "just below" the range Fed officials consider neutral, a setting created to neither speed nor slow growth.

His remarks were in stark contrast to comments he made in October when he said interest rates were a "long way" from a neutral level. But some economists say three rate increases for next year are beginning to look less certain.

The spark for the market rise was a sentence at the start of Powell's address to the Economic Club of NY.

Other Fed watchers still expect at least one or two rate increases in 2019 before the central bank pauses to observe how the economy is performing.

"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and worldwide financial markets and strains in institutions", according to the Fed report. Current financial system vulnerabilities are at a "moderate level", the Fed has said.

As he did at an appearance earlier this month, Powell cited strong annual economic growth above 3 percent and unemployment at a near five-decade low of 3.7 percent. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases. This is probably because Fed Chair Jerome Powell stole most of the thunder the day before with his dovish remarks about the fate of future rate hikes.

October's Wall Street sell-off and a rise in bond yields tightened financial conditions while some sectors most sensitive to interest rates, such as the housing sector, had already begun to slow.

But Powell also noted a number of looming risks, including the slowdown in global growth and the fading economic benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed's own rate hikes.

President Donald Trump made a series of unusual comments about the Federal Reserve in an interview with the Washington Post on Tuesday, bashing his Fed Chair Jerome Powell and displaying a deep misunderstanding of the institution's strategy.

Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell meant to send a message or was simply misunderstood.

He also said the central bank did not see "dangerous excesses" in stock markets, with the financial system now "substantially more resilient" than it was before the 2008 financial crisis.

In an interview with the Washington Post, Trump said the Fed was "way off base".

But many economists warn that by attacking the Fed for raising rates, Trump is actually putting pressure on the central bank to raise rates to demonstrate its independence from political considerations.

Still, Mr. Powell's observation appeared to soothe anxious investors.

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