Was Post-Fed Chair Speech Rally a Market Overreaction?


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.

In October, Powell said the central bank is "a long way" before getting rates to a neutral level, his latest remarks suggest otherwise.

"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.

Interest rate-sensitive financials dropped 0.8 percent, as US 10-year Treasury yields continued to fall following the release of the Fed minutes. For the stock market, he emphasised that current valuations are broadly in line with the long term levels and do not see "dangerous excesses" in equities.

In his NY speech Wednesday, Powell did not dispute the widely held belief that the Fed will raise interest rates again in December, saying, "There is no preset policy" about tightening. That sets the ideal environment for the Fed to continue its slow increase of borrowing rates.

But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes.

He told an audience in NY on Wednesday, "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".

In the week ahead, the Fed will see one of the last big economic statistics before its next interest rate decision.

United States stock markets jumped following the comments, as investors interpreted them to mean the central bank was close to the end of its tightening cycle.

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That's clearest in Eurodollar futures, which reflect the market's expectation for the three-month Libor (the London interbank offered rate, a key money-market benchmark).

The Fed chairman said the central bank is monitoring potential vulnerabilities in the banking system to ensure its continued stability.

"Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook", said the minutes.

Mr Trump has criticised Mr Powell repeatedly this year, saying that the base rate is unnecessarily high and risks curtailing an economic boom in the US.

In an interview this week with The Washington Post, Trump said he was not happy with Powell's support for further rate hikes.

Higher interest rates tend to slow economic growth over time as well as pressure stock prices.

Currently, the Federal Open Market Committee forecasts three quarter-point hikes for next year after a December increase, which is virtually guaranteed.

"We will say it again, despite the broad narrative that the Fed has gotten spooked by the equity market volatility (something Powell again refuted in his speech today), the most likely trajectory for Fed policy has not changed", Porcelli added.