Publicado: Ср, Декабря 05, 2018
Financiera | Por Marilu Caballero

Wall Street rallies as Fed sees interest rate 'just below' neutral

Wall Street rallies as Fed sees interest rate 'just below' neutral

Eurodollar futures pricing reacted to Powell's comments, reflecting even firmer expectations that the Fed will hike only once next year.

Meanwhile, the dollar retreated with potentially fewer rate increases on the horizon, and sterling rose after the Bank of England said the economy could shrink by as much as 8 percent in about a year after a no-deal Brexit.

The central bank's rate increases have gradually raised borrowing costs for consumers and businesses.

But many economists warn that by attacking the Fed for raising rates, Trump is actually putting pressure on the central bank to raise rates to demonstrate its independence from political considerations.

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.

In recent weeks, Fed officials have taken care to soften that outlook as certain pockets of the USA economy signaled weakness.

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Despite Trump's tough remarks on the trade dispute ahead of Saturday's meeting with Chinese President Xi Jinping, markets focused on comments by White House economic adviser Larry Kudlow, who indicated the two countries could call a truce. "Potential growth for supply is very limited and demand remains robust even though we've seen a decline in auto sales in China and a slowdown in vehicle sales in the U.S.", said Suki Cooper, precious metals analyst at Standard Chartered Bank. Fed officials also discussed how to communicate a possible change in their approach to any further hikes. The courts ruled decades ago that "for cause" meant more than a policy disagreement with the president.

While noting that some forms of corporate debt levels have become concerning, Powell the financial system and markets appear far sturdier than they did before the 2008 crisis.

In a speech Tuesday, Vice Chairman Richard Clarida suggested that the Fed would continue to strive to be "data dependent" by using the latest readings on the economy "with a healthy dose of judgment and humility" to determine its interest-rate policy. Those trends, he said, were coinciding with inflation remaining "right on target" at the Fed's goal of 2% annual price increases. "We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note.

On the same day the Fed released its first-ever semi-annual Financial Stability Report, Powell highlighted some concern over corporate debt levels, pointing especially to highly-leveraged borrowers who may "surely face distress if the economy turned down".

He noted that unexpected events can trigger recessions, but "I don't know what it will be" that might halt the current expansion. His remarks then led to an equity market sell-off as investors feared fast interest rate hike pace would slow down the economy.

Investors seemed to interpret Powell's comments as a sign that the Fed, which is widely expected to raise rates again at a meeting next month, may now only hike rates once or maybe twice at most in 2019 as opposed to earlier forecasts of three or four hikes. But Shayne and I believe that on this dovish statement 3 rate increases for next year look less certain.

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