Federal Reserve Chairman's Magic Words Spur Stock Market Surge

U.S. President Donald Trump walks on the South Lawn after returning to the White House in the early morning hours from a trip to Mississippi

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

Federal Reserve Board Chairman Jerome Powell speaks at the Economic Club of NY, on November 28, 2018, in NY.

Trump has repeatedly attacked Powell for continuing to raise the benchmark lending rate, which he says undermines the work he is doing to juice the U.S. economy.

Within just eight weeks, according to the Fed chairman, the central bank's base rate had gone from a "long way from neutral" to "just below" that level.

Trump has previously lamented interest rate hikes and expressed regret about nominating Powell.

"A couple of participants noted that the federal funds rate might now be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations", said the minutes.

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"His description highlights the significant uncertainty around estimates of neutral, a theme he mentioned at his speech at Jackson Hole in August", Jan Hatzius, chief U.S. economist for Goldman Sachs, wrote in a note to clients Wednesday.

Some pointed out that corporate capital investment has slowed down amid uncertainty over trade policies. "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".

Mr Powell's comments appear to implicitly reject arguments from President Trump that past interest rate rises have been a mistake. Next year, investors will hear from Powell after all 8 of the Fed's policy meetings, giving the markets even more chances to test their faith in the Fed chair.

"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and worldwide financial markets and strains in institutions", according to the Fed report. "Such a change would help to convey the committee's flexible approach".

US Federal Reserve chairman Jerome Powell may have given India an early Christmas gift.

But Powell's most recent words should be taken along with other recent remarks in which he showed concern for the global economic outlook.

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One additional twist investors will need to adjust to next year will be the potential for rate changes at any of the Fed's monthly gatherings.

But policymakers may be divided over what to do after that, with some anxious that raising rates after December could "unduly slow" the American economy, just as signs of vulnerability are beginning to gather, the minutes showed. "I think that was what really sparked the market to go higher". "Certainly, all meetings are live now".

"What do you do?" said Powell in NY.

Markets are now trying to divine Powell's plans from data pulling in two directions - rising wages that could be a precursor to inflation, for example, compared to slowing growth and falling oil prices that may keep inflation down, or other indicators clouding the picture. The Fed's benchmark federal-funds rate since then has been between 2% and 2.25% - or just below the lowest estimate.

When interest rates are neutral, the economy is on a sustainable path. Deviations from neutrality can cause booms and busts. Three of those increases have been under Powell.

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.

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Responding to the interviewer's comment that he had considered Powell would be a "low-rate person", Trump said: "Well, let's see what happens with Jay Powell".

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