Fed chair says economy is in ‘good health’ despite risks

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On Wednesday, Federal Reserve Chair Jerome Powell spoke before the Economic Club of NY and the reaction from investors was practically exuberant.

The Dow Jones Industrial Average soared 617.70 points, or 2.50 percent, to 25,366.43.

Some of Powell's previous observations and similar remarks from other Fed officials have raised hopes in financial markets that the central bank may be close to slowing its rate increases, which have gradually raised borrowing costs for consumers and businesses.

Here's the key line from Powell investors latched onto: "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".

Powell offered few clues on how much longer the US central bank would raise interest rates in the face of a slowdown overseas and market volatility at home.

"The risks of destabilizing runs are far lower than the past", Fed Chairman Jerome Powell said in a speech Wednesday. The Fed has raised rates three times this year.

Other Fed watchers still expect at least one or two rate increases in 2019 before the central bank pauses to observe how the economy is performing.

The Fed fund futures contract expiring in January 2020, a heavily traded contract that reflects market expectations for where rates will be at the end of 2019, rallied sharply on record volume and pointed to an implied yield of 2.7 per cent.

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The report card is included in the New York Fed's survey of primary dealers that each quarter elicits an assessment of the Fed's communication with markets and the public over the prior six to eight weeks, using a scale of zero, for "ineffective", to five, for "effective".

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.

And any signs of an increase continued to be met by vituperation from President Donald Trump, who has denounced the current tightening cycle at the Fed, which Congress made independent of the White House. Many people, including Trump, say they are hopeful the two leaders will reach a breakthrough and avoid further tariffs. The courts ruled decades ago that "for cause" meant more than a policy disagreement with the president.

In remarks delivered Wednesday in New York, Fed chairman Jerome Powell uttered words that set Wall Street on fire.

The chairman added that the Fed regards no major asset class as significantly inflated, "as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom".

"It's important to distinguish between financial market volatility and events that threaten financial stability", he said. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2 per cent annual price increases.

In the past, Powell has mentioned a number of looming risks to the economy, including the slowdown in global growth and the fading benefits of the tax cuts and government spending boost that took effect this year as well as the cumulative effect of the Fed's own rate hikes. Investors have been bracing for higher interest rates in the face of possible inflation stemming in part from Trump's trade wars as well as the tax cuts he pushed through Congress late a year ago.

"I do think over time folks will have to get used to the idea that we can and will move at any meeting", said Powell in a question-and-answer session in Dallas.

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