Markets may have misread Powell speech, analysts say

Was Post Fed Chair Speech Rally a Market Overreaction

Nearly all Federal Reserve officials at their last meeting agreed another interest rate increase was "likely to be warranted fairly soon", but also opened debate on when to pause further hikes and how to relay those plans to the public.

"The health of the economy gradually but steadily improved, and about three years ago the [Fed] judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates", he said. "We have to be thinking about how much further to raise rates and the pace at which we will raise rates".

The current Federal Fund rate is 2.25 per cent, and there is a 77 per cent probability of a 25-basis point increase in the December meeting scheduled in the week before Christmas.

"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said.

That "just below" phrasing seemed to indicate that the Fed is almost done raising rates for the time being.

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"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell", said Tom Porcelli, chief USA economist at RBC Capital Markets. Many investors read the remarks as signalling the Fed's three-year tightening cycle was drawing to a close.

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. That suggested to many investors that fewer rate increases might be on the way.

A few participants also expressed reservations about the timing of the next rate hike, suggesting that the benchmark rate - which determines the cost of borrowing on credit cards, mortgages and other loans - may now "be near its neutral level" and "further increases" could slow down the economy's expansion.

Rising wages and robust consumer confidence mean there is a good chance that GDP growth will remain strong before slowing in line with more recent trends, some participants said.

"Powell is not suggesting that since they are just below the range they may stop soon".

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"What do you do?" said Powell in NY.

"Given the volatility you've seen recently, it's probably quite reasonable to expect a little bit of a bounce. I think that's what we've been doing".

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. USA 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.

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy. "However, market pricing implies that while the Fed is likely to hike in December (about 80% priced), it will move only once in 2019".

In November, Fed policymakers agreed to hold rates steady, leaving the benchmark rate unchanged in a range of 2% and 2.5%. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

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