Dow jumps more than 500 points as Fed chief Powell strikes dovish tone on rates
U.S. stocks vaulted higher Wednesday afternoon, with the Dow Jones Industrial Average surging more than 500 points as Federal Reserve Chairman Jerome Powell came across as comparatively more dovish about interest rates in contrast to his previous comments.
Worries about tighter liquidity as the Fed maintained a hawkish stance in its bid to normalize the monetary policy had cast a shadow on the market.
How are the benchmarks trading?
The Dow YMZ8, +2.18% rallied 544 points, or 2.2%, to 25,293, while the S&P 500 index SPX, +1.83% advanced 49 points, or 1.9%, to 2,732. The Nasdaq Composite Index COMP, +2.38% rose 163 points, or 2.3%, to 7,246.
What’s driving the market?
“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 during a speech at the Economic Club of New York.
The comments were widely viewed as a retreat from his stance in early October when he had said that the central bank “may go past neutral, but we’re a long way from neutral at this point, probably.”
The more benign tone follows another round of harsh criticism from Trump, who told the Washington Post in a Tuesday interview, that he was “not even a little bit happy” with his selection of Powell to succeed Janet Yellen as Fed chair. Trump has repeatedly criticized the Fed for raising interest rates.
Still, Powell said nothing to blunt expectations for a rate increase when Fed policy makers meet next month.
Aside from policy, trade concerns continue to linger as investors await developments from the G-20 summit, set to begin Friday in Buenos Aires, and which will include a face-to-face meeting between President Trump and Chinese President Xi Jinping.
The president and his top economic adviser, Larry Kudlow, both made statements this week that cast doubt on the likelihood of a trade deal or framework that would prevent new or expanded tariffs on Chinese imports from taking effect in 2019. Other media reports, however, suggest that this is just posturing on the part of the White House.
What are the strategists saying?
Ian Shepherdson, chief economist at Pantheon Macroeconomcs, warned that Powell’s remarks were “not as dovish as markets think.”
Shepherdson noted that the “broad range of estimates” of the neutral rate in the Fed’s September forecasts ran from 2.5% to 3.5%, while the target range for the fed-funds rate is now at 2% to 2.25%. So while the bottom of the range of estimates cited by Powell is only one rate rise away, current rates are still three hikes from the middle of the range and five from the top, he said.
“Mr. Powell’s own views might well be leaning to the dovish side, but he was not, in our view, signaling any impending change” in the Federal Open Market Committee’s so-called dot-plot projections of future interest rates, he said.
The strong GDP report, although a revision of the initial third-quarter GDP estimate, “is a reminder to investors just how strong the U.S. economy is. With such strong growth, it’s hard to make the case that the U.S economy is deteriorating,” said Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors.
“We believe that market volatility is likely to increase as the G-20 summit draws closer,” Charalambos Pissouros, senior market analyst with JFD brokers, wrote in a research note. “Headlines suggesting that the two leaders could eventually find common ground may boost further risk appetite. The opposite could be true if news point to further escalation.”
https://www.marketwatch.com/story/stock-index-futures-point-to-gains-ahead-of-speech-by-fed-chief-powell-2018-11-28