Markets may have misread Powell speech, analysts say

A US five dollar note is seen in this illustration

US stocks closed higher Wednesday, with the Dow Jones Industrial Average surging more than 600 points, as investors digested Federal Reserve Chairman Jerome Powell's comments on future interest rates.

Stocks extended gains after Powell's remarks, with the Dow Jones Industrial Average DJIA, +1.80% rallying 420 points.

Still, Powell said the economy was close to meeting the Fed's mandate of promoting maximum employment and price stability.

Policymakers had provisionally pencilled in three quarter-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - that is, neither speeding up nor slowing down growth", said Powell. "Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon" if employment and inflation remain in-line or stronger than the Fed's current expectations, the minutes said. That relieved investors who feel the 9-year-old bull market could come to an end if rates rise too fast. "From the financial stability perspective, however, today we do not see risky excesses in the stock market", Powell said. The president has even gone so far as to call the Fed's rate hikes "loco" and said in Tuesday's interview that "the Fed is a much bigger problem than China".

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

There might be fewer interest rate hikes in 2019.

US President Donald Trump has repeatedly slammed the Fed chair for raising rates too often.

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While Trump's pressure may not be as tactful as Nixon's - and may in fact backfire - the specter of the incident still looms large over president-Fed interactions. His predecessors took care not to directly attack the central bank's rate policy out of concern that such criticism could backfire.

"If there has been one certainty of late it is the market's ability to misinterpret Fed Chairman Powell". The officials said the raid wasn't related to its role as a correspondent bank for money laundering at Denmark's Danske Bank.

These more measured reads on Powell's comments, however, are not what Wall Street says it heard on Wednesday.

Powell reassured investors that the Fed wouldn't risk killing off economic growthby continuing to aggressively raise rates next year.

The speech was focused on stability in the financial system, and Powell cited four potential vulnerabilities for the economy, including excessive leverage and debt loads in some sectors.

It isn't clear that these conditions could trigger a recession on their own, he said, noting that the ratio of corporate debt to economic output didn't seem unusual.

The dollar index, which measures the greenback against a basket of currencies, was down 0.6 percent after Powell said that while there was "a great deal to like" about United States prospects, the Fed's gradual interest-rate hikes are meant to balance economic risks. His speech will be parsed for signs of rate hikes next year, especially after Fed officials cautioned over global growth outlook and markets witnessed about two months of volatility. But Shayne and I believe that on this dovish statement 3 rate increases for next year look less certain. Some analysts are now saying the Fed may decide to raise rates only once or twice in 2019.

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