Fed emphasises flexible policy path after likely December hike

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US equities rejoiced in the form of a 600-point rally in the Dow Jones Industrial Average as a result of Federal Reserve Chairman Jerome Powell's speech at the Economic Club of NY on Wednesday where he sounded more dovish on the central bank's inclination to hike rates further.

Claiming that benchmark lending rates were "just below" a range of estimates for "neutral", that is, neither stimulating nor slowing growth, Powell sent a signal that markets took to mean the Fed might ease off on raising rates in 2019.

On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a "long way" from a so-called neutral level and that the Fed might even tighten policy beyond that level. His remarks Wednesday appeared to suggest to this audience that he might stop sooner or move more slowly.

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

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Next month's expected quarter-point increase would lift the central bank's target for the federal funds rate to a range of 2.25 per cent to 2.5 per cent.

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. Investors have overreacted to relatively nuanced comments from Mr Powell in the past, and it is possible some misread his comments by believing he was telegraphing an end to interest rate increases.

Powell in his remarks Wednesday also raised the importance of policymakers staying flexible in charting a path of policy given that the effects of rate hikes show up with a lag - a point that was reinforced in the Fed's November minutes.

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 and chief market strategist at Bruderman Asset Management in NY.

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His clarification Wednesday didn't otherwise indicate any substantive change in the Fed's policy plans.

With last year's deep tax cuts and fiscal stimulus from Congress, the world's largest economy continues to hum, producing steady job growth and driving the unemployment rate to its lowest level since 1969 even as inflation remains right at the Fed's two percent target.

Trump has repeatedly attacked Powell over rate increases, calling the investment banker he selected past year to oversee the world's most powerful central bank a "threat". "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". Bloomberg Economics anticipates three increases.

The speech was "a reassuring message from a market perspective because it removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy", he added. At best, the coming meeting could see a shift in the majority of Fed representatives surveyed from three to two rate hikes in 2019.

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Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish".

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