Framework For Monitoring Financial Stability

By Doug Noland

Upon the public release of Jerome Powell’s Wednesday speech came the Bloomberg headline: “Powell: No Preset Policy Path, Rates ‘Just Below’ Neutral Range.” When the Fed Chairman began his presentation to the New York Economic Club just minutes later, the Dow had already surged 460 points. From Powell’s prepared comments: “Interest rates are still low by historical standards, 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.” When he read his speech, he used “range,” as opposed to “broad range” of estimates.

Equities responded to the Chairman’s seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, “We may go past neutral, but we’re a long way from neutral at this point, probably,” back on the third of October. Powell’s choice of language was viewed consistent with the ‘much closer’ to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday’s speech: “Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC.”

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