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Is Powell signalling end of Fed's tightening cycle?
US FEDERAL Reserve chairman Jerome Powell gave investors a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy US economy.
His comments were interpreted by many investors as a signal that the Fed's three-year tightening cycle is drawing to a close. Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether he intended to send a message or was just misunderstood.
Early last month, Mr Powell said the key interest rate was probably still a "long way" from a so-called neutral level and that the Fed could even tighten policy beyond that level. Stocks swooned as investors bet the US central bank would need more rate hikes to prevent the economy from overheating.
The possibly dovish shift in language on Wednesday came as US President Donald Trump stepped up attacks on Mr Powell, criticising the Fed's rate hikes as undercutting his economic and trade policies. Mr Trump told Washington Post on Tuesday that he was "not even a little bit happy" with the Fed chief.
Mr Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice-chairman at Bruderman Asset Management.
The Fed has settled into a quarterly rate-hike cycle and is still expected to raise rates again next month, in what would be the fourth hike this year. But signs of a slowdown overseas and nearly two months of market volatility have clouded an otherwise mostly rosy US picture in which the economy is growing well above potential and unemployment is lowest since the 1960s.
"We know that things often turn out to be quite different from even the most careful forecasts," Mr Powell said on Wednesday. "Our gradual pace of raising interest rates has been an exercise in balancing risks."
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", he added.
Factually, Mr Powell's remarks on Wednesday and in October are both true. On Wednesday he referenced a range, and in October he likely referenced a median.
The benchmark rate, now at 2 to 2.25 per cent, is within a quarter of a percentage point of the bottom of the Fed's range for neutral, but is also several quarter-point rate hikes below the mid-point estimate of 3 per cent.
Although a December rate hike has been widely expected, the Fed's path next year has been more uncertain, with investors last month expecting even three rate hikes in 2019.
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.
It was 2.95 per cent earlier this month, suggesting investors have scratched off a full rate hike from their forecasts of Fed policy.
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.
Since then, he and other Fed officials have sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China.
Mr Powell said the Fed is paying "very close" attention to economic data even as it expects continued "solid" growth, low unemployment, and inflation near its 2 per cent target. REUTERS