Published: Mon, January 07, 2019
Medicine | By Tracy Klein

Dovish Fed Chief Powell Delivers What the Markets Wanted

Dovish Fed Chief Powell Delivers What the Markets Wanted

Data released earlier on Friday showed USA employers added the most workers in 10 months as wage gains accelerated. "Can we wait?", Cleveland Federal Reserve Bank President Loretta Mester said in an interview with Reuters. Powell said he did not think the latter was having much impact on markets, but that the strategy would be changed if it started interfering with the bank's broader goals of maintaining strong employment and stable inflation.

The Fed, which hiked benchmark US interest rates four times a year ago including in December, is however not on a preset path and could pause policy tightening as it did in 2016 when global growth concerns led to doubts about the USA economic recovery, he said.

Powell denied the criticism that the Fed's gradual reduction of its holdings of Treasuries, mortgage bonds and other assets - amounting to 4.5 trillion dollars when the Fed began its balance sheet normalization program in October 2017 - had exacerbated the stock market turbulence in the fourth quarter of 2018.

"Markets are expressing concerns about global growth in particular and trade negotiations", Powell said.

That robust figure, however, will not as of now change the Fed's plan to conduct two rate hikes this year, as the central bank awaits more economic indicators coming in the next few months.

The S&P closed up 3.4 percent. That could lead to renewed turbulence as the Fed and other central banks seek to normalise monetary policy at a time of cross currents in the global economy.

"That's quite welcome", Powell said.

Traders said Powell's comments were perceived as dovish because he said the Fed had no preset path for policy and could be patient when it comes to future interest rate hikes. This response no doubt helped the market to recover on Friday.

Overall, she said she felt the Fed was in a "really good spot". Under the law that governs the Federal Reserve, a president can only remove a Fed chairman for cause.

A strong jobs report from the Bureau of Labor Statistics also likely quelled some fears that the U.S.is part of a broader economic deceleration. Powell responded with a terse "No" when asked if he would resign if Trump requested him to do so. But it has been gradually reversing that stance over the past year, although the balance sheet still remains above $4 trillion.

Federal Reserve Chairman said the central bank can be patient as it assesses risks to a USA economy with good momentum and will adjust policy quickly if needed.

"We are in a new world", Mester said, where the obvious need to raise rates has given way to a situation where economic growth is expected to slow, wages are rising on the basis of low unemployment, interest rate sensitive sectors of the economy like housing have ebbed, and the unemployment rate has roughly "stabilized" at a low level.

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