The Federal Reserve Chairman said US interest rates closed at "neutral" levels, triggering rally in the stock market, as investors interpreted commentary as a signal that the central bank was about to slow down its growth rate.
While advocating the recent gradual increase in Fed rates, Jay Powell said the central bank will be watching very closely new economic data as monetary policy decides what to do next.
Rates are "just below" neutral estimates – a level that does not accelerate growth or slow down growth – said Fed Chairman, with a possible signal that politicians may decide not to improve them.
"There is no preset policy path," said Mr. Powell. "We will pay close attention to what the incoming economic and financial data tell us."
The commentary at the New York Central Business Club came on Wednesday when he faced the intensifying pressure of the White House to avoid further rate hikes. President Donald Trump this week told The Washington Post The Fed, which is expected to raise rates for the fourth time this year, "is the basis of what they are doing."
Mr. Trump added, "I'm not a little satisfied with Jay's selection yet."
Markets responded abruptly to Mr. Powell's comments, which contrasted with the rating he gave last month. Earlier in October, he said that rates were "a long way" from neutral levels, which led to a sales disbursement, as investors were worried that the Fed is preparing for a long line of rising rates.
The S & P 500 rose 1.6 percent after afternoon trading in New York, and jumped the percentage point after Mr. Powell stepped in. The Dow Jones industrial average expanded its profits by 1.9 percent and Nasdaq Composite rose 1.9 percent.
Government bonds have gathered because yields were lower. The ten-year US Treasury benchmark's yield declined by 0.3 basis point to 3.0498 percent when it rose by 1.1 points before Mr Powell spoke. The yield of a more sensitive two-year government bond fell 2.4 percentage points to 2.8066%.
In his speech, Mr. Powell did not directly refer to Mr Trump's criticism. But he insisted that the Fed was right if it decided to gradually raise rates after judging that the economy was no longer well served by the exceptionally low rates that prevailed after the financial crisis in 2008.
"Interest rates are still low, according to historical standards, and remain just below a broad range of estimates that would be neutral to the economy – that is, without speeding up or slowing growth," said Mr. Powell. "My FOMC colleagues and myself, like many private sector economists, are predicting continued solid growth, low unemployment and inflation of nearly 2%."
The gradual rise in Fed rates was a two-risk exercise, Powell added.
"Moving too fast could risk shortening expansion," he said. "We also know that too slow the shift of interest rates too long – could threaten further distortions in the form of higher inflation or destabilizing financial imbalances."
The paper came after a new report on the financial stability of the Fed. He said the total debt in the financial system was not "abnormal or excessive". Although some asset valuations were high, the Fed did not see "dangerous excesses" in the stock market.
The Fed Chairman also offered a harsh look at the risks in the financial markets when he said that even though politicians are tracking the areas, including rising corporate indebtedness, the overall system was resilient. Fed's latest health checks suggest that "all things are considered good health," said Mr. Powell.
A major area of concern was the provision of loans to businesses where businesses with high debt and interest burden most supported their loans, and the credit quality of credit underwriting deteriorated.