Fed emphasises flexible policy path after likely December hike

Powell defends Fed charge hikes amid Trump onslaught			 0					By		Marta Subat

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY.

United States markets were sent soaring Wednesday after Fed chief Jerome Powell said borrowing costs were still historically low but only "just below" the neutral level, a rate that neither stimulates nor restrains the economy.

While the speech had "cleaned up after Powell's sloppy language last month", markets may have reacted too strongly to the comments, said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

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 Fed altered its stance on rates to "just below the neutral rate" from its earlier articulated position of "a long way to neutral", lowering the chances of quick increases in the cost of funds.

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

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. "This was again on display today", RBC Capital Markets chief US economist Tom Porcelli wrote in a note. The wording was already chosen so as not to further fuel market turmoil.

Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 percent - in early October, just after Powell had sounded a quite confident tone on the economy. Since a September news conference when he painted a rosy picture of where things stood, some economic indicators have softened; others, such as wage growth, have firmed, leaving the Fed for the first time in a long time pulled in different directions.

"There is a great deal to like about this outlook", said Powell on Wednesday.

US Fed chairman hints at higher rates following Trump attack
And he said the financial system was now "substantially more resilient" than it was before the 2008 financial crisis. While Powell said Fed officials are monitoring these risks, they are not on the whole too anxious about them.

"The messaging from the USA over the last four weeks has been characteristically erratic", said David Page, senior economist at AXA Investment Managers.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the USA dim the appeal of risky assets.

Powell, in remarks just two weeks ago, had listed three possible challenges to growth in 2019: slowing demand overseas, fading fiscal stimulus at home and the lagged economic impact of the Fed's past rate increases.

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.

US President Donald Trump has repeatedly slammed the Fed chair for raising rates too often.

But from there, paths diverge. Those at Goldman Sachs Group Inc. and JPMorgan Chase & Co. predict four hikes next year, while their counterparts at Morgan Stanley and Citigroup Inc. forecast two.

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