Powell’s description of the central bank’s approach sent the stock market soaring, with investors eager for any sign that the Fed might be preparing to pause its slow but steady effort to raise interest rates. The Dow Jones industrial average pushed up 618 points, to 25,366, an increase of 2.5 percent, in a surge that erased its November losses and put it back in positive territory for 2018. The Standard & Poor’s 500-stock index climbed 2.3 percent, and the tech-heavy Nasdaq composite index rose 3 percent.
Powell’s scheduled remarks at the Economic Club of New York came a day after President Trump pilloried Powell — whom he appointed last year — for his stewardship of the central bank. Trump said in an interview with The Washington Post that the Fed is a “much bigger problem than China,” complaining it is taking steps to withdraw stimulus from the economy — the latest in a wave of strong criticism that Trump has leveled at the Fed chair.
Fed officials say they operate independently of politics, and there is no evidence that Powell made his comments in response to Trump’s attacks. But the remarks nevertheless could ease concerns among Fed critics, such as Trump, who have accused the central bank of moving too aggressively to slow the economy’s expansion.
The Fed had lowered rates to zero after the 2008 financial crisis, and it kept them there and took other steps to strengthen the economy after the deepest recession since the 1930s. Since December 2015, it has been reversing those efforts to avoid inflation and other risks associated with a hot economy.
Still, Trump and others hoping that the Fed would stop raising rates immediately were likely to be disappointed. Investors have overreacted to Powell’s language before, and the Fed is still expected to raise rates in December and perhaps again next year.
“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,” Powell told the Economic Club of New York.
According to the Fed, the long-run interest rate for the economy is projected around 3 percent. The Fed is holding rates at between 2 and 2.25 percent. It influences the economy by manipulating the Fed funds rate that serves as a benchmark for lending by many institutions.
Powell’s remarks are indicative of a difficult balance point he is seeking in his handling of the economy. Raising interest rates makes it more expensive to borrow money and increases the cost of credit for households and businesses, and hiking them too far could trigger a recession. But if the Fed does not act, it could let the economy overheat in a way that leads to an eventual recession.
Although he didn’t mention Trump by name, Powell’s remarks did appear to push back strongly against the notion that the Fed was miscalculating the economy. Powell said his Fed colleagues and many other economists “are forecasting continued solid growth, low unemployment and inflation near 2 percent.”
He also said the central bank would continue reevaluating the strength of the economy, saying that “there is no preset policy path” for where to go next.
“Our gradual pace of raising interest rates has been an exercise in balancing risks,” Powell said. “We know that moving too fast would risk shortening the expansion. We also know that moving too slowly — keeping interest rates too low for too long — could risk other distortions in the form of higher inflation or destabilizing financial imbalances. Our path of gradual increases has been designed to balance these two risks, both of which we must take seriously.”
Trump has unloaded heaps of criticism aimed at Powell in recent weeks, as the president has blamed the central bank chief for raising interest rates in a way that Trump says has unsettled the stock market. It is unusual for a president to criticize the Fed, which is supposed to operate independent of politics.
“I’m not happy with the Fed,” Trump said in the interview with The Post. “They’re making a mistake because I have a gut and my gut tells me more sometimes than anybody else’s brain can ever tell me.”
The Fed is tasked with maximizing employment and stabilizing prices. By controlling interest rates, it aims to prevent the economy from growing too quickly and creating distorted prices in the stock market and elsewhere that eventually crash and lead to a recession.
But knowing when to raise interest rates can be challenging, and people often have different opinions about how much running room the Fed should permit.
In response to questions after his speech, Powell noted recent stock market volatility but said the Fed was largely focused on slower-moving trends that tell him more about the health of the economy. He also described the Fed’s cautious approach toward raising interest rates as akin to being in a room with furniture when the lights go out and then having to proceed carefully to avoid bumping into anything.
Investors noted the shift in Powell’s tone from previous statements.
“Hip hip hooray,” said Nancy Tengler, chief investment officer at Heartland Financial. “In October, Powell was saying we were a long way from neutral. Now he is saying we are close. That is a big shift in tone.”
Powell’s nuanced comments eased investor concerns about 2019. Investors had been worried that too many rate hikes at too fast a pace would raise the cost of borrowing across the board, from mortgages to car loans.
“They are going to raise rates in December. The market knows that. But investors were worried about 2019. Now it’s looking for the Fed not to raise rates as much in 2019,” said Scott Wren of the Wells Fargo Investment Institute.
Because inflation has remained relatively low, a number of people have said the Fed should consider pausing its pace of interest rate increases. Jason Furman, who served as President Barack Obama’s top economic adviser, said on Wednesday that because price growth has “slowed” in recent weeks, the Fed should pause to better assess what is happening in the economy.
Powell’s comments came the same day the Fed released a report that highlighted the near-term risks of potential international shocks to the financial system, as well as longer-term risks such as corporate debt. It said a number of risks, if mismanaged, could prove jarring to the economy.
“An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,” the Fed report said. “The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.”
The Fed report said U.S. banks and brokerage firms are “some of the markets most likely to be affected” by Brexit, as the Conservative government led by British Prime Minister Theresa May pushes its plan for Britain to leave the European Union. That could lead to spillover effects in the U.S. economy overall if the large U.S. trading partner faces an economic setback.
Additionally, total debt held by U.S. businesses as a share of gross domestic product is at a “historically high level,” though that growth has slowed during the first half of this year. The report also points to a slowdown in the Chinese economy, which recently grew at its slowest pace since 2009.
“The U.K. economy is suffering from the uncertainty of Brexit, and Europe is staggering some. There’s also been a slowdown in China,” said Allen Sinai, chief economist and strategist at Decision Economics. “The links are to the U.S. financial system that the Federal Reserve oversees, and these risks are worth noting.”
But the report also gives cause for comfort. The Fed report notes that America’s banks are strongly capitalized and well poised to absorb the kind of shocks to the financial system that sent Wall Street into a tailspin in 2008. Insurance companies, too, are in a safer position than they were before the 2008 financial crisis, according to the report.
Jeff Stein contributed to this report.