Stocks Soar, Yields Dip after Powell Changes View on Rates

The major U.S. stock indexes extended their gains on Wednesday after Federal Reserve Chairman Jerome Powell said interest rates are close to neutral. This assessment was a lot softer than his remarks made less than two months ago that spooked the stock markets.

“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,” Powell told the Economic Club of New York.

In early October, Powell helped set off a 10 percent decline in stocks when he said the Fed was “a long way” from neutral. Investors felt at that time that a series of aggressive rate hikes might put a halt to the strong economic growth of the past two years.

Powell also made further statements to demonstrate that the Federal Open Market Committee, which determines the direction of interest rates, does not have a predetermined notion for where rates should be and will be making policy decisions instead on developing economic and financial conditions.

“While FOMC participants’ projections are based on our best assessments of the outlook, there is no preset policy path,” he said. “We will be paying very close attention to what incoming economic and financial data are telling us. As always, our decisions on monetary policy will be designed to keep the economy on track in light of the changing outlook for jobs and inflation.”

Powell once again did not address President Trump’s criticisms of him and Fed policy, instead focusing on an economy that continues to perform well at a growth rate above 3 percent and with inflation contained around the Fed’s 2 percent mandate.

“There is a great deal to like about this outlook. But we know that things often turn out to be quite different from even the most careful forecasts,” he said.

Powell also commented on the Fed’s Financial Stability Report, which assesses the risks in the banking system and the strength of the consumer balance sheet. He did note potentially serious problems with elevated levels of corporate debt.

“Information on individual firms reveals that, over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most,” he said. “In addition, other measures of underwriting quality have deteriorated, and leverage multiples have moved up. Some of these highly leveraged borrowers would surely face distress if the economy turned down, leading investors to take higher-than-expected losses–developments that could exacerbate the downturn.”

Powell also said that “we do not see dangerous excesses in” equities. As far as corporate risk is concerned, Powell said, “My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level.”

The stock market reacted positively to the speech with the Dow soaring more than 450 points. Treasury bond yields fell.