Is Powell signalling end of Fed's tightening cycle?

Is Powell signalling end of Fed's tightening cycle?

Wall Street last month gave the Federal Reserve its worst grade since Jerome Powell took the helm of the USA central bank earlier this year, docking points for a communications misstep early in October that sent US stocks tumbling.

Still, Powell sent the stock market soaring by suggesting that interest rates are just below the so-called neutral rate at which they will neither boost nor slow growth.

The downgrade is at least partly attributable to Powell's remark on October 3 that interest rates were probably a "long way" from neutral, which seemed to contradict his comment a couple of months earlier rejecting a too-rigid reliance on the neutral rate to shape policy because it could lead to costly mistakes.

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

A senior U.S. Federal Reserve official said on Friday that the Fed should pause on interest rate hikes as inflation remains under control.

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In the past week, the chairman of the Federal Reserve gave hope to stock buyers that the agency is close to finishing its long, drawn-out process of getting its target interest rate back to a normal level.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients.

The central bank expects the unemployment rate to remain historically low next year.

During the Fed's November meeting, participants discussed a number of risks that could sweep away their rosy economic outlooks and change the path of policy, including "high levels of uncertainty" over the impact fiscal and trade policies on growth and inflation.

On Wednesday, Mr. Powell pointed to the range of neutral-rate projections submitted by 15 Fed officials at their policy meeting in September, varying from 2.5% to 3.5%.

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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. "You slow down. You maybe go a little less quickly". "But we know that things often turn out to be quite different from even the most careful forecasts". Investors interpreted as Powell either changing his position on interest rates or attempting to correct the incorrect interpretation of his earlier remarks. At the same time, Fed officials are emphasizing they are becoming increasingly reliant on indicators and data to tell them that they are getting close to neutral.

Minutes released yesterday from the Fed's last policy meeting also showed some policymakers believed going above neutral could slow the economy needlessly. Bloomberg Economics anticipates three increases.

In his speech, which was focused on the Fed's assessment of the health of the USA financial system, Powell said it is "important to distinguish between market volatility and events that threaten financial stability".

In his highly anticipated address, which came on the heels of a tumultuous month for the markets, Powell noted that the central bank is trying to carefully strike a balance between raising interest rates too quickly, and too slowly.

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