Fed Signals End Of Rate ‘Normalization’

By Bryan Rich

November 15, 5:00 pm EST

One of the spots weighing on the market has been the Fed’s persistent increase in interest rates.  With that, and with some soft spots showing in the global economy and a more challenging policymaking environment ahead in Washington, we were watching Fed Chair Powell’s remarks very closely late yesterday (after the market close) for some signalling that a pause on rate hikes might be coming.

Unlike past Fed heads, Powell is a plain spoken guy.  And he tends to be very clear in his messaging.  With that, he didn’t seem to have an agenda for sending a clear signal to markets yesterday. But he did have some dovish takeaways.  He said they are at the point where they have to take seriously the risk of moving too far and stifling the recovery and not moving far enough to manage inflation. On that note, he acknowledged that the level of interest rates are weighing on the house market.  And he said signs of a global slowdown are concerning.  So, he tells us they’re watching the data closely for next moves, and then he tells us some data is suggesting slowing.

Now, it’s common for other Fed governors to be out talking, between meetings, in an effort to set market expectations. With that said, the bigger signalling came today.  The Atlanta Fed President and a voting Fed governor on monetary policy (Bostic), had a prepared speech in Madrid today.  He said the Fed is in the final steps of getting to the neutral rate (which means neither accommodative nor restrictive).  He said that’s where they “want to be” and then said he thinks the neutral rate is between 2.5% and 3.5%. Rates are currently 2%-2.25% (almost the low end of his neutral range).  And he said they should proceed cautiously with rate increases.  Bottom line:  These statements suggest the Fed could be done with the ‘normalization’ process of rates after one or two more hikes.

So, we were looking for the Fed to use the weakening global growth data this week (from Japan and Europe), some softer global inflation data, and the changes in Congress, as an excuse to dial down the market’s expectations for the path of rates.  It was subtle, but I think we’ve seen it.

Indeed, stocks ripped higher on Bostic’s comments this afternoon.  The Dow jumped about 1.5% today as the comments hit the news wires.

Moreover, we’ve had some more uncertainty removed from marketsin the past 24-hours.  We now have trade discussions re-opened between China and the U.S.  And today, the U.S. Treasury has named the individuals that will be sanctioned in Saudi Arabia, regarding the murder of Khashoggi.  To this point, the Saudi Crown Price isn’t one of them, which means the Saudi government is not being sanctioned.

It’s been a violent six weeks for stocks, but the lows from late October remain well intact.  And we may now be clear for another recovery leg of this recent broad market correction.

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