Federal Reserve chair Jay Powell has tempered his tone on rate hikes.
In a speech before the Economic Club of New York on Wednesday, Powell said, “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.”
In October, Powell suggested the Fed was a “long way” from neutral. This remark was seen by many investors as triggering the stock market volatility we’ve seen over the last few weeks as it suggested the Fed could be more aggressive than markets were forecasting in raising interest rates.
Tweaking this language to say rates are “just below” neutral is what investors have latched onto on Wednesday as a sign Powell is tempering some hawkishness interpreted in his earlier remarks.
Following the release of Powell’s remarks, U.S. stocks were soaring with the Dow up more than 400 points and all three major U.S. indexes up more than 1% on the session. Bond yields were also dropping — and thus bond prices rising — following Powell’s comments.
Ahead of Powell’s speech Wednesday, investors were looking for any signs the Fed is considering a change to its current forecast for interest rate hikes over the next year which indicate at least three — but likely four — more rate hikes will occur by the end of 2019. In December, markets expect the Fed will raise the target range for its benchmark interest rate by 25 basis points, its fourth move this year. The market’s initial reaction to Powell’s speech is that the Fed will indeed be less aggressive than it had suggested.
In early October, Powell said in an interview with PBS that the Fed’s policy stance was a “long way from neutral,” a comment that some investors have blamed for pressuring financial markets in the ensuing weeks, as it implies a more hawkish tilt from the Fed chair. Most economists estimate the “neutral” rate — or interest rate at which the Fed achieves its dual mandate goals of full employment and 2% inflation — at around 3%. The current effective Fed funds rate is sitting just below 2.2%.
Powell attempted to somewhat downplay the impact recent volatility may have had on his thinking about rates, saying, “It is important to distinguish between market volatility and events that threaten financial stability. Large, sustained declines in equity prices can put downward pressure on spending and confidence. From the financial stability perspective, however, today we do not see dangerous excesses in the stock market.”
Powell’s speech also comes against the continued backdrop of a president that is critical of the job being done by the Fed. Powell’s prepared remarks were also be followed by a Q&A, though the Fed chair was not asked about his relationship with the president.
On Tuesday evening, The Washington Post published an interview with Trump in which he again voiced his displeasure with Powell, saying that, “I’m doing deals, and I’m not being accommodated by the Fed.” Trump added, “So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off-base with what they’re doing.”
‘Overall financial stability vulnerabilities are at a moderate level’
Powell’s speech also followed the release of the Fed’s financial stability report published Wednesday morning, which called out what the Fed sees as valuations in financial markets that are “generally elevated” and show investors exhibiting a “high tolerance for risk-taking, particularly with respect to assets linked to business debt.”
The report adds that, “debt owed by businesses relative to gross domestic product (GDP) is historically high, and there are signs of deteriorating credit standards.”
In his speech, Powell said, “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.” .
Wednesday’s speech was seen by some investors as a chance for Powell walk back these comments, or at least temper market fears about the Fed raising rates too quickly, if he so chose. The market’s reaction suggests the Fed chair has done just that.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland