Powell muddies Fed’s monetary message to pacify markets for now

Fed's Powell Pledges Patience, Sensitivity to Risks in Markets

President Donald Trump has criticized the Fed chief for raising interest rates and Bloomberg News reported December 21 that the president had discussed firing Powell. The move was not only fueled by massive monthly jobs growth which blew away the estimates, but also a bigger-than-expected rise in wage growth. On Friday, his softer tone eased investor concerns about further tightening, noting that the Fed will be flexible with all of its monetary policy tools, including the important balance sheet. 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 has willfully ignored trade and interest rate risks while talking a hawkish game".

The major US stock indexes finished sharply higher on Friday on the back of two key bullish events.

Stocks surged on Friday after the Labor Department reported USA firms created 312,000 jobs in December, and Powell said the Fed would be flexible in deciding on any further rate increases.

The S&P closed up 3.4 percent.

Private economists viewed Powell's comments as a strong signal that the Fed, which in December had projected another two rate hikes in 2019, may end up deciding to pause hikes for several months. "We're hearing a lot from different groups of people about the role the balance sheet normalization may be playing in the market", Powell said. This response no doubt helped the market to recover on Friday. Powell said last week he wouldn't resign if the president asked him to step down. Under the law that governs the Federal Reserve, a president can only remove a Fed chairman for cause.

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Trump has complained that the Fed has pushed rates higher despite the fact that there is no evidence that inflation was getting out of control.

The two former central bank chairs also threw their support behind Powell and Fed independence following months of escalating criticism from Donald Trump.

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.

Powell's willingness to be flexible on interest rates was welcome news to investors, many of whom anxious that Fed chair risked cutting off the current economic expansion by continuing to raise interest rates despite signs the US economy was cooling off a little. In the first event, the Labor Department's December jobs report showed the economy added a robust 312,000 jobs. But it has been gradually reversing that stance over the past year, although the balance sheet still remains above $4 trillion.

"Nothing's been scheduled, I would say that meetings between presidents and Fed chairs do happen", he told moderator and New York Times reporter Neil Irwin.

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