Wall Street rallies as Fed sees interest rate 'just below' neutral

Bloomberg

Bloomberg

"I am pleased to say that our economy is now close to both of those objectives", Powell said in an appearance at the Economic Club of NY.

The Fed chief said in his speech that interest rates remain "low by historical standards" and still provide stimulus to the economy.

Trump on Tuesday again blasted his hand-picked chief of the U.S. central bank, saying he was "not even a little bit happy" with his selection of Powell.

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.

Powell's speech came a day after US President Donald Trump's latest attack on the US central bank. The benchmark rate, now at 2.00-2.25 percent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 percent.

Powell has been gradually raising rates since he was confirmed to his position by Trump in January.

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.

"They're making a mistake because I have a gut and my gut tells me more sometimes than anybody else's brain can ever tell me", Trump said in an interview with The Washington Post.

US Fed chairman hints at higher rates following Trump attack

While Powell said Fed officials are monitoring these risks, they are not on the whole too anxious about them.

Although a December rate hike has been widely expected, the Fed's path next year has been more uncertain, with investors last month expecting two or even three rate hikes in 2019.

Powell has dismissed the unprecedented political attacks from Trump, saying they have no influence on deliberations of the independent central bank.

But the report highlighted stock prices that are high by some measures, commercial real estate values "growing faster than rents" and the willingness of lenders to fund risky corporate loans.

The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, Powell said.

The report noted several signs of resilience in the financial system to the sorts of unexpected shocks that might arise, including the strong capital position of banks, generally tempered borrowing by households and a system less vulnerable to the sorts of runs or credit crunches that almost shut down the global economy in the 2007-to-2009 financial crisis.

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", he said.

Meanwhile "the unsettled state of trade negotiations, Brexit negotiations, budget discussions between Italy and the European Union, and cyber-related disruptions" all remain risks to the global economy.

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