Was Yesterday’s Giant Stock Market Rally Just One Big Misunderstanding?

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  • The market rallied Wednesday after Federal Reserve Chairman Jerome Powell said interest rates are “just below” the range of estimates for neutral.
  • Some prominent Wall Street economists didn’t see a major difference from previous remarks.
  • Powell’s remarks in October that the Fed was “a long way” from neutral helped spur a market sell-off on fears that the Fed would be more aggressive with rate hikes than Wall Street had been anticipating.
  • The key difference could be between the “range” of estimates on neutral and the median expectation of a neutral rate that is neither stimulative nor restrictive.
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Economists are taking a second look at Federal Reserve Chairman Jerome Powell‘s speech Wednesday and wondering if the sharply dovish reaction wasn’t a bit overdone.

The central bank chief’s proclamation that interest rates are “just below” what would be considered a “neutral” level represents a definite change in verbiage from his October “a long way from neutral” assessment. But as a practical matter, these Fed watchers say, the chairman was only saying that the current rate is near the “range” of estimates from the Fed’s individual policymakers. That range is between 2.5 percent and 3.5 percent.

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The distinction could be critical for where the Fed is headed.

“If there has been one certainty of late it is the market’s ability to misinterpret Fed Chairman Powell,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, said in a note. “The market viewed this as a dovish development. We think this is the wrong interpretation. Powell is not suggesting that since they are just below the range they may stop soon. All he is doing is pointing out an obvious idea.”



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