U.S. stocks jump on 'dovish' speech by Fed chief, Dow +2.5%

Marcus Newton
December 1, 2018

Considering that there have been no interest-rate hikes since September, these comments tell the market one of two things, which is that the Fed has finally figured out where the neutral rate is, or they believe that a pause in tightening has become necessary, said BK Asset Management foreign exchange strategy MD Kathy Lien. Those remarks sent stocks down as investors bet the Fed would need more rate hikes to prevent the economy from overheating.

"The question for financial stability is whether elevated business bankruptcies and outsized losses would risk undermining" financial stability, Powell said at the Economic Club of NY. He added that the Fed regards no major asset class as significantly inflated, "as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom". This softer language indicates the Fed will likely raise rates in December. "My [Federal Open Market Committee] colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation remaining near 2 percent".

"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", the report said. It described funding risks in the financial system as low, meaning the chance that mispricing of one asset - in 2007, for example, housing - triggers a run by investors that puts the solvency of US banks at risk. Those decisions have drawn rebukes from Trump, who wants the Fed to focus on economic growth.

Under the leadership of Fed Chair Jerome Powell, appointed by Trump as an independent regulator, Fed officials have relaxed some rules put in under the 2010 law enacted by President Barack Obama and the then-majority Democrats in Congress, aimed at preventing a recurrence of the crisis and massive taxpayer bailout of US banks.

But the report also noted that stock prices are high by some measures, commercial real estates values have been "growing faster than rents", and that lendershave been freely funding risky corporate loans.

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"So far, I'm not even a little bit happy with my selection of Jay", the Post quoted Trump as saying in an interview, referring to the man he picked past year to lead the Fed.

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 United States economy.

He said the central bank's policies are responsible for recent stock market declines and for GM's announcement this week that it would close five factories in North America and lay off 14,000 workers next year, the Post reported.

"I'm doing deals, and I'm not being accommodated by the Fed", Trump told the Post on Tuesday. For those reasons, this year's hikes have made the Fed the target of unusual public attacks from Trump - criticism that has accelerated with the past month's sharp declines in the stock market.

After keeping rates at a record low near zero for seven years, the Fed three years ago began gradually raising rates, including three hikes this year.

Other reports by MaliBehiribAe

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