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Powell defends Fed charge hikes amid Trump onslaught

01 December 2018

USA equities rejoiced in the form of a 600-point rally in the Dow Jones Industrial Average as a result of Federal Reserve Chairman Jerome Powell's speech at the Economic Club of NY on Wednesday where he sounded more dovish on the central bank's inclination to hike rates further.

USA markets were sent soaring Wednesday after Fed chief Jerome Powell said borrowing costs were still historically low but only "just below" the neutral level, a rate that neither stimulates nor restrains the economy.

Ironically, it was a reference to that guidepost that led to what in retrospect looks like a communication stumble, when stocks tumbled in early October after Powell's remark that interest rates were a "long way" from neutral and might even need to rise above that level.

Analysts read that as a suggestion that Powell intends to be more cautious about hikes in rates.

The US Federal Reserve Chairman has raised speculation the Fed might start easing-off on its series of rate hikes. Fed officials agreed that it would be "appropriate" to take action before the December meeting if necessary to keep the federal funds rate "well within" the Fed's target range, according to the minutes. Why should he? The data for the USA economy remains strong. Investors have overreacted to relatively nuanced comments from Mr Powell in the past, and it is possible some misread his comments by believing he was telegraphing an end to interest rate increases.

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The possibly dovish shift in language on Wednesday came as President Donald Trump stepped up attacks on Powell, criticizing the Fed's rate hikes as undercutting his economic and trade policies.

After bottoming out to new lows several times between October and November, 10-year treasury note and 30-year treasury bond futures have jumped to months-long highs on the run-up to the final meeting of the Federal Open Market Committee.

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

But he cautioned that things could turn out a lot differently than the Fed expects.

While numerous Fed watchers saw the remarks as nothing new, many investors heard it as a signal that the central bank was far from finished raising interest rates.

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Powell, in remarks just two weeks ago, had listed three possible challenges to growth in 2019: slowing demand overseas, fading fiscal stimulus at home and the lagged economic impact of the Fed's past rate increases.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected previous year to oversee the world's most powerful central bank a "threat". "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", he was quoted as saying in the report. Three of those increases have been under Powell. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.

"There is a great deal to like about this outlook", said Powell on Wednesday.

The minutes of the Fed's November 7-8 meeting showed that officials expressed concerns about a variety of threats, including the impact of tariffs, a slowing global economy and tightening financial conditions amid falling stock prices.

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Powell defends Fed charge hikes amid Trump onslaught