Chief economist update: Powell Power

We may have a Santa Claus rally this year after all!

US Federal Reserve chairman Jerome Powell spooked us all - in the Halloween month of October - when, in an interview with PBS, he declared that: "The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don't need those anymore. They're not appropriate anymore. Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral. We may go past neutral, but we're a long way from neutral at this point, probably."

As a result, US benchmark equity indices dropped in the month of October - S&P 500 (-6.9%); DJIA (-5.1%); Nasdaq (-9.2%); Russell 2000 (-10.9) - pulling down stock market indices around the world with them.

But hey, today is a different day - it's a bright, bright, sun-shiny day.

Sure, we've already heard Fed vice-chairman Clarida talking about the Fed being "much closer" to neutral and Atlanta Fed President Bostic speak of the fed funds rate being "not too far" from neutral, but nothing beats hearing the same from the Fed's head honcho himself.

In his speech before The Economic Club of New York on "The Federal Reserve's Framework for Monitoring Financial Stability," Powell declared:

"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. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2%."

And about the equity markets...

"The asset class that gets the most attention day-to-day is, of course, the stock market. Today, equity market prices are broadly consistent with historical benchmarks such as forward price-to-earnings ratios. It is important to distinguish between market volatility and events that threaten financial stability. Large, sustained declines in equity prices can put downward pressure on spending and confidence. From the financial stability perspective, however, today we do not see dangerous excesses in the stock market."

Up, up and away. US equities soared upon hearing this. S&P 500 (+2.3%); DJIA (+2.5%); Nasdaq (3.0%); Russell 2000 (+2.5%).

Merry Christmas! It would even be merrier if Trump and Xi's meeting in Argentina this weekend leads to ceasefire in the trade war.

Then again, of course, the unpredictable entity that is Trump will keep us guessing ... including the Fed.

Still, Powell's latest recantation indicates that the Fed put is back on. A deterioration in US-China trade talks or increased tariffs on both sides should drive a greater dovish slant from the Fed.

Read more: TrumpArgentinaDJIAMerry ChristmasNasdaqRussellAtlanta Fed President BosticClaridaDear VirginiaEconomic Club of New YorkHalloweenPBSPowell PowerSanta ClausUS Federal Reserve Chairman Jerome
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