Federal Reserve Chairman’s Magic Words Spur Stock Market Surge

Jeremy Sandberg
By Jeremy Sandberg
November 29, 2018New York

The value of stocks jumped for U.S. and Asia markets after the Federal Reserve chairman indicated interest rates would remain unchanged for the New Year.

Speaking at the Economic Club of New York on Nov. 28, Jerome Powell outlined the Fed’s decision to slow or pause interest rate movements in 2019 and would continue to monitor the nation’s financial stability.

The words prompted traders and analysts to revise their latest economic forecasts that predicted the Fed might raise rates in December for the fourth time this year before approving a further three rate hikes next year.

Earlier in November, Powell was optimistic about the state of the economy, citing strong annual economic growth exceeding 3 percent and unemployment at a near five-decade low of 3.7 percent.

“The unemployment rate is 3.7 percent–a 49 year low, and many other measures of labor market strength are at or near historic bests,” he said.

Powell also revealed the economic growth coincides with inflation, and the Fed’s annual goal of 2 percent interest rate increases. He has also expressed concerns over risks, such as slowdown in global growth and trade tensions.

Traders work on the floor of the New York Stock Exchange
Traders work on the floor of the New York Stock Exchange on Nov. 28, 2018. (Spencer Platt/Getty Images)

Higher interest rates tend to slow economic growth over time as well as pressure stock prices according to Powell.

“It’s important to distinguish between financial market volatility and events that threaten financial stability,” he said. “Large sustained declines in equity prices can put downward pressure on spending and on confidence. From a financial stability perspective; however, today we do not see dangerous excesses in the stock market.”

Magic Words Sends Stocks Soaring

After Powell’s speech stocks immediately soared, with the Dow surging 617 points to close at 25366.43.

“Interest rates are still low, by historical standards, and they remain just below the range of estimates of that level, that would be neutral for the economy,” said Powell.

Analysts think a rate hike next month is likely, but economists admit three rate increases for next year are beginning to look less certain, especially if stock market volatility increases and consumer and business sentiment worsens in early 2019.

The Associated Press contributed to this report.

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