(Reuters) - U.S. Federal Reserve Chair Jerome Powell said on Wednesday that while there was “a great deal to like” about U.S. prospects, the Fed’s gradual interest-rate hikes are meant to balance risks as it tries to keep the economy on track.
Powell offered few clues on how much longer the U.S. central bank would raise interest rates in the face of a slowdown overseas and market volatility at home. Instead he highlighted a new financial stability report the Fed published earlier on Wednesday.
**FED CHAIR POWELL: GRADUAL U.S. RATE HIKES BALANCE RISKS TO FORECAST
**POWELL SAYS ‘GREAT DEAL TO LIKE ABOUT’ U.S. ECONOMIC OUTLOOK
** POWELL SAYS FED BALANCING RISKS OF SHORTENING EXPANSION ON ONE HAND, HIGHER INFLATION AND INSTABILITY ON OTHER
**POWELL REPEATS SEES ‘MODERATE’ OVERALL VULNERABILITIES TO FINANCIAL STABILITY
**POWELL EXPECTS SOLID U.S. GROWTH, LOW UNEMPLOYMENT, NEAR-TARGET INFLATION
**POWELL: NO PRE-SET POLICY PATH; PAYING ‘VERY CLOSE ATTENTION’ TO DATA
**POWELL: ‘CLOSE’ TO PRICE STABILITY, MAXIMUM EMPLOYMENT MANDATES
**POWELL: POLICY RATE ‘JUST BELOW’ ESTIMATES OF NEUTRAL
**POWELL: NEW FINANCIAL STABILITY REPORT AIMS TO BOOST DEMOCRATIC LEGITIMACY OF FED
STOCKS: S&P 500 .SPX extended gains and was last up 1.42 percent. The Dow Jones Industrial Average was up 1.73 percent.
BONDS: U.S. Treasury yields fell; 2s US2YT=RR were at 2.8087 pct; 10s US10YT=RR at 3.0608 pct
FOREX: The U.S. dollar index .DXY turned negative and was last down 0.39 percent
MICHAEL SKORDELES, U.S. MACRO STRATEGIST, SUNTRUST ADVISORY SERVICES, ATLANTA
“What’s important is that he’s saying the words ‘no preset policy path.’ That may be giving the market a little more clear signal, not that (the Federal Reserve) definitely will pause, but that they will pause if they need to. That data dependency is what the market needs to hear.”
“The idea is that four rate hikes are penciled in for 2019 in their outlook, but there might not end up being four….They’ll look at the data, and if it’s slowing down, they’ll react to it. If it’s quite strong, they will end up raising rates, but probably not faster than anyone expects.”
“It’s not some sort of mechanical thing. What is inflation doing? What is the growth data? How’s the rest of the world doing? If everything else is slowing down, there isn’t as much of a need to raise as many times as they may have forecasted.”
“We doubt they’ll do the full set of rate hikes in 2019. It may end up being two or three times.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW ASSET MANAGEMENT, CHICAGO
“It sounds like the market is reading his comments as being that they’re letting off the gas as far as raising rates. That’s certainly very different than what market participants were led to believe based on his comments in October.
“Investors are figuring if we’re close to being done raising rates, it takes away one of the headwinds (for stocks). Everybody’s been penciling in persistently higher interest rates.”
MICHAEL DEPALMA, CHIEF EXECUTIVE, PHASECAPITAL LP, NEW YORK
“(Powell) is reiterating things that were in the financial stability report. Clearly the financial system is more stable that it was pre-crisis, especially if you’re looking at banks.”
“The risk to the economy from financial stability is a lot lower than it was pre-crisis. Having said that, there are things the Fed is concerned about including that rates are just below neutral. I don’t know what “just below” means, it looks like one more hike is baked into the cake this year. If you follow the dot plots as consensus, there should be two more hikes next year, though that is not guaranteed and will be data dependent.”
“If the Fed sticks to its mandate and ignores political noise, there should be scope for further rate hikes next year - and more rate hikes than are currently priced into the market.”
“The first thing that jumped out to me was his assessment of the neutral rate, that we are just below. Back on Oct. 3 he said that we were a long way from neutral. The Fed has not raised the rates in order to gain ground on neutral between Oct. 3 and today, so therefore his view of the economy has declined. The Fed always says policy adjustments affect the economy with a lag, never very specific about the lag, a quarter or two, today he said we also know that economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized. That may just be saying this stuff affects it with a lag, it may also be saying that without inflation nipping at our heels here, we may need to take some significant time off to see what we’ve done.”
JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH ADVISORS, CHICAGO
“He said interest rates are just below the neutral range. He’s now acknowledging he’s close to neutral which suggests maybe not quite as many rate hikes in the future as investors believed. It’s certainly a change of language and welcome news to investors.”
“It makes the value of risk aversion less attractive so it makes risk taking, such as stock investments, more attractive. In order to take investment risk you have to lower the bar to risk aversion.”
“It’s just saying that there’s a little caution, you turn the dial today and you’re not going to feel the effects for a while. The inference is they’re going to be pretty incremental in their approach. It seems like the Fed is somewhat sensitive to stock market volatility. Whether he’s listening to Trump or not I don’t know.”
JJ KINAHAN, CHIEF MARKET STRATEGIST, TD AMERITRADE, CHICAGO
“It is one more hike and then let’s reassess because some of the numbers have changed. The note in here where he starts his conclusion where he says ‘putting financial stability in a longer-term context,’ that is actually what the market really likes here. It is not just living report to report, there is a longer term plan. He talks about the three ways you are changing things, he talks about looking at a long-term goal because you are through the crisis, it is a different economy, so it has to be managed differently. He talks about the health of the economy a few different times, the health of the financial system, how the loans systems have changed a little bit so people actually view that there may be some risk sometimes.
“It is really well done in the terms of that it is starting to spell out a new vision and that is what the market likes, where it is not just a day-to-day management. The market absolutely loves it to say the least. It reminds me a little bit of when a CEO comes out and says we have a good company, we are not measuring quarter to quarter because that’s what companies do in crisis but we are laying out our plan and if you buy our stock you’ll be happy in two years.”
WALTER TODD, CHIEF INVESTMENT OFFICER, GREENWOOD CAPITAL, GREENWOOD, SOUTH CAROLINA
“The market is keying on the first headline I saw...which is no preset policy path, rates just below neutral range.”
“A month and a half ago he said we’re a long way from neutral, and now he’s saying we’re just below neutral. That’s a pretty dramatic change.”
“If you go on to read some of the other comments, it’s more balanced. But clearly that’s the one the market is diving in on.”