Powell muddies Fed’s monetary message to pacify markets for now

07 January, 2019, 08:55 | Author: Cynthia Curry
  • Commodities

The Dow Jones Industrial Average surged almost 750 points Friday, more than erasing its losses one day earlier, as a stock market hungry for good news received two morsels: a stronger-than-expected jobs report and comments from the Federal Reserve Chairman that signaled more flexibility in raising interest rates.

The central bank chief's remarks came on the heels of a report released Friday by the U.S. Bureau of Labor Statistics showing U.S. nonfarm payrolls rose by a seasonally adjusted 312,000 in December, well above the average monthly job gains of 254,000 for the last three months and the strongest average employment increase in more than two years. Sellers were also driven by a dramatic shift in the tone of U.S. Federal Reserve Chairman Jerome Powell, who reversed his hawkish tone from December to dovish.

Powell "said exactly what the markets wanted to hear", said Gregori Volokhine of Meeschaert Financial Services.

Taken together, Mester said, those are the sorts of developments one would expect in an economy where interest rates were near a neutral level that was neither encouraging nor holding back economic activity. Still, recent declines in financial markets reflect concerns among investors about downside risks to the outlook, he said.

Both of those messages cheered stock market investors who had been anxious about Trump's repeated attacks on his hand-picked choice to lead the nation's central bank and also the Fed's seemingly inexorable march to higher rates.

The S&P 500 Index jumped 3.4 per cent on Friday in response, though the stock gauge is still off about 14 per cent from its September peak.

Compared to comments he made after the Fed raised rates last month, "it's not that he's changed his message. but that he explained it more patiently and in greater detail", said Lou Brien, market strategist at DRW Trading in Chicago.

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"I found it actually quite surprising how benign markets were for such a long time, despite the risks of trade wars and other things that were going on", Bernanke said in an observation that's shared privately by some Fed officials.

The head of the Fed, once confirmed by the Senate, can only be removed "for cause", not a policy disagreement.

"The market's been grappling with growth, the Fed and China", said Tony Roth, chief investment officer at Wilmington Trust in Wilmington, Delaware.

At the conference on Friday, Mr Powell said he has not spoken directly to Mr Trump and would not resign if asked. Sliding equity prices, weakness overseas and mixed economic data at home have prompted calls for the Fed to put rates on hold, but the USA labor market remains red-hot. Powell responded with a terse "No" when asked if he would resign if Trump requested him to do so.

The Fed's tightening cycle includes both rate hikes and the gradual shedding of its more than $4 trillion in assets.

Analysing the Fed statements, James Glassman, senior economist at JP Morgan said, "We have got very strong job news, the economy got lot of momentum to generate this kind of job news then why has the US Fed become cautious - it is because the inflation trends have been little more moderate".

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