Interest rates in the US are 'just below' neutral, Fed's Powell says

Speaking at the Economic Club of New York, Jerome Powell said interest rates remained low by historical comparisons "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."

At the start of October, Powell had said that short-term rates remained a "long way from neutral", catching some observers off guard and leading markets to mark-up expectations for policy tightening.

Following that, on 14 November, he indicated in a speech that: "We have to be thinking about how much further to raise rates, and the pace at which we will raise rates [the goal is to] extend the recovery, expansion, and to keep unemployment low, to keep inflation low."

In reaction, some market watchers accused Powell of "blinking" in the face of recent volatility in financial markets.

Despite that, on Wednesday, Powell appeared to a tow line that was slightly more dovish than that taken by his number two, Fed vice chairman Richard Clarida, just the day before.

To take note of, in his remarks in New York, Powell also appeared to emphasise 'data dependency', meaning that rate-setters would be watching incoming even more closely.

Nevertheless, Ian Shepherdson at Pantheon Macroeconomics was not on board with a dovish interpretation of Powell's remarks, telling clients that the focus from newswires on Powell's reference to rates being "just below" neutral was disingeneous.

"But this is misleading; what the Chair actually said was that rates are "just below the broad range of estimates of the level that would be neutral”. The broad range of estimates of neutral in the September forecasts was 2.5-to-3.5%, and the target range for the funds rate now is 2.0-to-2.25%. So the top of the target range is only one hike away from the bottom end of the range, but it remains three hikes from the middle of the range and five from the top," Shepherdson said.

"Moreover, estimates of the neutral rate are likely to rise over the next year on the back of stronger productivity growth. Mr. Powell’s own views might well be leaning to the dovish side, but he was not, in our view, signalling any impending change in the FOMC's dots. As always, the Fed ultimately will do what the data tell them to do, and we think the 3.7%-and-falling unemployment rate leaves policymakers very little room for maneuver."

Philip Marey, senior US strategist at Rabobank was of a similar view, saying: "If we read his words carefully there is actually less of a dovish shift than one would perceive at first sight."

However, in a research note sent to clients, Marey went on to say: "Our baseline scenario is that the yield curve inverts after the March hike and this will induce the Fed to take a pause. In their mind, an inversion would indicate that monetary policy is restrictive, and not that a recession is imminent as history teaches us.

"So we are likely to see history repeating itself with the Fed stopping the hiking cycle too late, inverting the yield curve, and causing –or at least contributing to– a recession."

As of 1802 GMT, the yield on the benchmark two-year US Treasury note was down by two basis points at 2.81%, having fallen as low as 2.79% following the Fed chairman's speech.