Markets

Powell signals more hikes ahead if US economy stays strong

Powell signals more hikes ahead if US economy stays strong

The benchmark S&P 500 stock index clinched its longest bull-market run on Friday, closing above its previous January high, as Federal Reserve Chairman Jerome Powell affirmed the US central bank's current pace of rate hikes.

The Fed is very confident in the USA economy and Mr Powell indicated there is no intention of slowing down the Fed's rate hikes, said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

The Fed has sought to strike a delicate balance as it wants to raise interest rates steadily to keep the economy from overheating, but that increasing rates too quickly could spark a recession in the world's biggest economy.

Kansas City Federal Reserve Bank President Esther George and Dallas Fed President Robert Kaplan both said that Trump's comments won't influence the Fed's decision making.

Strong economic growth and earnings and low interest rates have combined to continue to move the USA equity market higher, said Leo Grohowski, chief investment officer for BNY Mellon Wealth Management.

While US inflation has recently moved up near 2 per cent, Powell said he sees "no clear sign of an acceleration above 2 per cent" and there does not seem to be "an elevated risk of overheating".

An inverted yield curve, when short-term borrowing costs rise above long-term ones, has preceded almost every US recession in recent memory. "We are setting policy to do what monetary policy can do to support continued growth, a strong labour market and inflation near 2 per cent". "We are seeing some of the more cyclical sectors like energy, materials, continuing to move higher on the expectation that the Fed is going to let the economy run a little hot", Mr Zaccarelli said.

At the same time, Powell said that in case of another financial crisis or intensified concern about high inflation, "We will do whatever it takes". In June, most Fed officials projected the natural rate of unemployment was between 4.1% and 4.7%.

The Nasdaq rose 0.9 per cent to 7,945.98, also a fresh record, while the Dow Jones Industrial Average gained 0.5 per cent to 25,790.35, about 825 points below its all-time high. The Fed has raised the rate seven times since late 2015 and is projected to raise it again two more times this year. "But probably not that early, it's probably something like late this year, or next year".

He said there is also much uncertainty over the "neutral" rate of inflation - the point at which the Fed's policy rate is neither stimulating economic growth nor holding it back. -China tariffs boosted the greenback and the annual Federal Reserve conference in Jackson Hole, Wyoming began. But Powell noted that there's a wide difference of opinion about it.


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