Fed Chairman Says Interest Rates Are Just Below Estimates of Neutral

Was Post Fed Chair Speech Rally a Market Overreaction

Rising Rates Channel Was Post-Fed Chair Speech Rally a Market Overreaction?By Ben Hernandez

The Fed members' comments could comfort investors, who rallied on Wall Street after Fed Chairman Jerome Powell on Wednesday said interest rates were already close to estimates of "neutral" - the rate which neither accelerates not restrains economic activity - meaning they might not have to rise much higher. Investors interpreted as Powell either changing his position on interest rates or attempting to correct the incorrect interpretation of his earlier remarks.

"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.

A December increase would bring the policy rate close to the bottom of the 2.5% to 3.5% range policy makers estimated as neutral.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

The possible policy shift occurred at a meeting at which the Fed also resumed debate on how best to manage short-term interest rates in the future, a decision that could influence the final target size of the Fed's still-massive balance sheet.

U.S. Federal Reserve (Fed) said on Thursday that nearly all Fed policymakers expected another interest rate hike "likely to be warranted fairly soon".

Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week. This is probably because Fed Chair Jerome Powell stole most of the thunder the day before with his dovish remarks about the fate of future rate hikes. It promises to confirm investor expectations that the Fed will raise its interest rate when it meets later this month. Rather, we assume that Powell wanted to prepare the markets for a change in the central bank's communication.

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Stock markets began a broad descent toward a correction - a decline from the most recent peak of at least 10 per cent - in early October, just after Mr Powell had sounded a quite confident tone on the economy.

His clarification Wednesday didn't otherwise indicate any substantive change in the Fed's policy plans.

"What do you do?" said Powell in NY. "I think that's what we've been doing".

A few officials expressed concern about rates moving too high too quickly.

After the financial crisis erupted in 2008, the Fed kept rates at historically low levels to revive the ailing economy.

But policymakers may be divided over what to do after that, with some anxious raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed. Three of those increases have been under Powell. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

The minutes flagged the possibility that the Fed will make another adjustment to maintain control of the policy rate, by adjusting the separate interest rate on excess reserves, or IOER, which is now set at 5 basis points below the upper bound of the federal funds target range. Currently, the fed funds futures are pricing in an 83 percent chance of a December hike and one more in 2019.

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