Is Powell signalling end of Fed's tightening cycle?

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Benchmark long-term Treasury yields rose while short-term yields fell as investors were hanging on every word of Federal Reserve Chairman Jerome Powell's speech at the Economic Club of NY on Wednesday when Powell said that rates are "just below neutral", signaling a less aggressive rate-hiking policy moving forward.

At one point on Wednesday traders were pricing in slightly less than a quarter point hike in 2019 after Powell said in a speech that the fed funds rate was "just below" neutral. That contrasted with a remark Powell made in October that the Fed's policy rate was still a "long way from neutral". "There is no preset policy path, " the Fed chief said.

The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, he said.

Many Fed officials still believe more rate increases will be needed to prevent the economy from overheating.

The minutes from the rate-setting Federal Open Market Committee's November 7-8 meeting showed a rising level of uncertainty in the central bank about the near future. Many people, including Trump, say they are hopeful the two leaders will reach a breakthrough and avoid further tariffs.

Mr Powell's nuanced comments eased investor concerns about 2019.

While the speech had "cleaned up after Powell's sloppy language last month", markets may have reacted too strongly to the comments, said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.

Trump has repeatedly attacked Powell for continuing to raise the benchmark lending rate, which he says undermines the work he is doing to juice the U.S. economy.

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Mr Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management, told Reuters.

Investors will watch for the minutes from the Fed's November 7-8 meeting, due on Thursday, for clues to policy in 2019.

"We know that things often turn out to be quite different from even the most careful forecasts", Mr Powell said on Wednesday.

"Our gradual pace of raising interest rates has been an exercise in balancing risks", Mr Powell said. Investors might, for example, question whether the Fed would feel free to keep raising rates, if it felt it necessary to control inflation. Powell said he and other policy makers continue to see a "solid" outlook for the US economy, while noting that interest rates are "just below" the so-called neutral range.

Mr. Powell flagged rising indebtedness and deteriorating loan quality among some USA businesses as top vulnerabilities within the US financial system, but otherwise described such risks as moderate.

This month, Powell and other Fed policymakers have tried to dispel any perception of hawkishness. "In addition, other measures of underwriting quality have deteriorated, and leverage multiples have moved up". That comment had unsettled investors who feared that it meant the Fed would need a number of further hikes to get to neutral.

"Several dealers noted that recent communication from Fed officials has been clear".

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