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Stocks markets surge on hint of slower rate hikes

03 December, 2018, 00:36 | Author: Shawna Walton
  • Fed Rate hike 'warranted soon'

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.

In their biggest increases since March, the major Wall Street indexes were up. The S&P 500 rose 61.61 points, or 2.30 percent, to 2,743.78. The Nasdaq composite rose 2.9 percent to 7,291.59.

Federal Reserve Chairman Jerome Powell speaks at the Economic Club of New York's luncheon in New York November 28, 2018.

Higher interest rates tend to slow economic growth over time as well as pressure stock prices according to Powell.

The Fed members' comments initially appeared to comfort investors. The FOMC is likely to link future interest rate decisions more closely to incoming data and then decide on a case-by-case basis. While interest rates were gradually moving to a neutral point, "we're a long way from neutral at this point, probably".

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.

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

Many Fed officials still believe more rate increases will be needed to prevent the economy from overheating. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation. "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.

Trump followed this up with comments to the Washington Post.

The last two recessions were triggered when asset bubbles burst, and critics said the Fed should have done more to control the financial system.

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". But that is largely for show.

The speech was focused on stability in the financial system, and Powell cited four potential vulnerabilities for the economy, including excessive leverage and debt loads in some sectors. There was also concern that they could cause the economy to slow down excessively.

There was no "preset policy path", Powell said.

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-percent target.

This was music to the ears of the Wall Street traders and speculators. But that doesn't mean rates won't rise further, as most officials said another rate increase was likely, perhaps as soon as next month. One factor leading the fall has been fear of worsening prospects for hi-tech firms, with Apple initiating production cutbacks in its latest iPhone models, released in September.

In the United States, the major boost provided by the Trump administration's multi-billion cuts in corporate and personal income tax is expected to wear off in 2019.

The Fed chairman also said Wednesday that while some corporate debt loads have reached riskier levels, "we do not see unsafe excesses in the stock market". "In addition, the effect of a stronger dollar and weaker foreign economies on trade could affect the creditworthiness of US firms, particularly exporters and commodity producers".

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