European shares join Wall Street rally on dovish Fed comments

01 December, 2018, 12:58 | Author: Dave Hampton
  • Powell defends Fed charge hikes amid Trump onslaught			 0					By		Marta Subat

"Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure". Investors had been anxious that too many rate hikes at too fast a pace would raise the cost of borrowing across the board, from mortgages to vehicle loans.

The US central bank chairman has repeatedly tried to advise investors not to read too deeply into the Fed's economic forecasts, saying policymakers often don't have the ability to see that far into the future and decisions are formed based on incoming data from markets, the economy and business contacts.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target. "The market has already priced in 10 out of the 12 rate hikes that we expect".

Brent crude LCOc1 rose 51 cents to $59.27per barrel. That uptick followed two consecutive quarters of declines through to September, with prices hitting a 19-month low in August.

A Reuters survey published on Thursday showed however that a majority of analysts believe that the upward trend isn't over just yet with more than 40 per cent of strategists saying the current run has more than a year to go.

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On Wednesday, Jerome Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view the Fed will have to be especially responsive to the data. "Such a change would help to convey the committee's flexible approach in responding to changing economic circumstances".

"The messaging from the US over the last four weeks has been characteristically erratic", said David Page, senior economist at AXA Investment Managers.

One challenge for the Fed is that officials aren't sure where a neutral rate actually lies.

"We know that things often turn out to be quite different from even the most careful forecasts", Powell said at an Economic Club of NY luncheon on Wednesday.

Higher rates are seen to weigh on bullion, which doesn't bear interest.

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"We also know that the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized", he said.

Investors say a sustained market rally following the summit would hinge on there being substantive concessions from Trump, in particular whether Xi can persuade Trump to postpone a sharp tariff hike on Chinese goods due to take effect January 1.

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY.

During the previous tightening cycle from mid-2004 to 2006, when borrowing costs rose to 5.25%, gold surged more than 50%.

"Gold may struggle to rally", Frappell said. "We still expect the Fed to hike rates twice in the first half of next year, before a slowdown in economic growth to below potential forces it to the side lines", Paul Ashworth, chief USA economist at Capital Economics, wrote in a note. US-China trade issues could also dominate the Fed's narrative, he added. Projections released in September showed most officials expected then they would raise rates once again this year.

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