Stock market may be 'over interpreting' Fed Chair Powell's speech

Roman Schwartz
November 30, 2018

The minutes showed nearly all Fed members agreeing that another rate increase was "likely to be warranted fairly soon", but also ticked off a series of issues that had begun weighing on their view of the economy.

Mr. Powell didn't provide any more guidance on the likely path for rates, and he noted they remain low by historical standards. That appeared to signal that while the Fed may raise interest rates again next month, it isn't overly concerned about inflation, assuaging fears among many investors that rates will continue to climb for the foreseeable future.

The Fed chairman also said Wednesday that while some corporate debt loads have reached riskier levels, "we do not see unsafe excesses in the stock market".

"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell", said Tom Porcelli, chief US economist at RBC Capital Markets. This gap, which measures expectations on rate increases in the next year, has narrowed to 23 basis points, indicating that traders are not penciling in more than one increase in 2019, although the Fed's median projections still point to three increases next year.

It was a significant change in language compared to Mr Powell's previous comments, nearly two months ago, that USA rates are a "long way" from neutral.

Fed Chair Powell gave markets a nudge yesterday evening suggesting that the current level of rates is just below the broad range of estimates of the level that would be neutral for the economy.

Powell also revealed the economic growth coincides with inflation, and the Fed's annual goal of 2 percent interest rate increases.

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"I think the president got to him", Geltrude said, adding that Trump acted like a baseball team's manager berating the umpire for a bad call. However, it did signal a potential shift in tone about the pace of future rate hikes.

Rather, he said, the Fed will assess the most recent economic and financial data in deciding whether or how fast to keep raising rates. Many people, including Trump, say they are hopeful the two leaders will reach a breakthrough and avoid further tariffs.

But giving financial stability a marquee publication of its own shows the importance the issue has taken on as Fed officials strive to avoid the mistakes that led to the 2007 financial crisis.

"We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note.

A few officials expressed concern about rates moving too high too quickly. The minutes show support for a fourth rate hike this year when the committee meets again, December 18-19, if the labor market and inflation continue as expected.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes. The dot plot (see chart below) suggested higher conviction for a December rate hike and three rate hikes in 2019. 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.

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