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US Fed does about-turn on interest rates

01 Février 2019

Citing rising uncertainty about the U.S. economic outlook, Fed Chairman Jerome Powell said the case for raising rates had "weakened" and, in a statement, the United States central bank dropped its earlier expectation for "some further" tightening.

Investors liked what they heard.

The Dow is up nearly 15 percent since its recent trough on December 24. The rate, which the Fed on Wednesday left in a target range of 2.25 percent to 2.50 percent, is well below historical averages, and barely above the rate of inflation. As part of this shift, "Powell is doing his best to bury" the Phillips Curve concept that central bankers have hewed to for years, which ties changes in inflation to job-market developments, Feroli said.

"The Fed (Federal Reserve) decision should not only be supportive of risk markets, but also the weaker dollar backdrop could be extended, which should support EM assets, especially at a time when China is attempting to stimulate growth", said Mohammed Kazmi, portfolio manager at UBP. Besides invoking the word "patient" to describe the Fed's outlook toward future hikes, Powell has stressed there's no "preset course" for rate increases.

Wall Street and Asia both rallied and Europe ran up as much as 1 percent until news that Italy was back in recession and other poor data took the wind out of the sails of most markets bar London. Last year, the Fed had predicted that there would be two more rate hikes in 2019.

The Fed raised rates four times last year and signaled in December that it would do so twice this year.

Further, the sharp slide in the equity and credit markets appeared to be having a dampening effect on consumer and business confidence-apart from the harm caused by the federal government's shutdown and the continuing trade tensions.

■ In its statement on Wednesday, the Fed said "economic activity has been rising at a solid rate". Recall that fears of an overly aggressive Federal Reserve helped send markets plummeting in November and December.

"Overall this signals the Fed will not be on autopilot going forward", said Justin Lederer, Treasury analyst at Cantor Fitzgerald in NY.

The tech-heavy Cheddar 50 Index, which measures the performance of Cheddar's 50 top companies ー from Apple ($AAPL) to GM ($GM) ー was up about 3.5 percent in intraday trading. The S&P 500 was up 23.51 points, or 0.89 percent, at 2,663.51 and the Nasdaq Composite was up 91.50 points, or 1.30 percent, at 7,119.79.

The language mimics previous comments made by Fed Chair Jerome Powell at the American Economic Association's annual meeting in Atlanta in early January.

Initial estimates put growth in France at 1.5 percent in 2018, a significant decline from the growth of 2.3 percent in 2017. In his press conference, Powell set aside concerns about inflation and financial stability, emphasizing instead that the current policy rate is appropriate for the current economy - as if another step by the Fed could cause things to crack.

Traders will be watching trade talks between the US and China which resumed in Washington, as well as an afternoon policy statement from the Federal Reserve. A survey of forecasters has estimated that the eurozone economy will grow by 1.5 percent this year, its slowest expansion since 2014.

US Fed does about-turn on interest rates