The Fed’s No. 2 on Rate Hikes and Inflation

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The Dow Jones Industrial Average surged more than 600 points, or 2.5%, to 25,366.43, while the broader S&P 500 index rose 2.28% to 2,743.43.

The Fed held rates steady at its November meeting, and made no mention in its statement after that session about the sharp sell-off in equity markets in the weeks before it.

"We see no major asset class", Chairman Powell said, "where valuations appear far in excess of standard benchmarks".

But some expressed "uncertainty" about how long the Fed should wait before raising again. Higher rates also increase the opportunity cost of holding gold, which does not pay interest. They offered few explicit clues, however, as to how many hikes he thinks will be necessary in 2019.

Powell noted that the economy is "near max employment, price stability" and major asset class valuations are "not far in excess", which could mean there may be more room to run for US equities. His predecessors took care not to directly attack the central bank's rate policy out of concern that such criticism could backfire. Trump has complained that the Fed is threatening to undo the economic stimulus being provided by the tax cuts and that its rate hikes are unnecessary because inflation has remained relatively low.

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Trump also used the opportunity to once again blast Fed Chairman Jerome "Jay" Powell. "Potential growth for supply is very limited and demand remains robust even though we've seen a decline in auto sales in China and a slowdown in vehicle sales in the USA", said Suki Cooper, precious metals analyst at Standard Chartered Bank. But after that, officials said further hikes would not be on a preset course. The courts ruled decades ago that "for cause" meant more than a policy disagreement with the president.

"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.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral.

Powell remains upbeat on the economy, forecasting continued solid growth, low unemployment and inflation near the Fed's 2 percent target.

Neither Clarida nor Powell said definitively whether rate hikes should stop at neutral, and each stressed that level was very hard to estimate.

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Policy makers provisionally penciled in three quarter-percentage-point rate increases for next year, according to the median of forecasts released in September's so-called dot plot.

The speech was focused on stability in the financial system, and Powell cited four potential vulnerabilities for the economy, including excessive leverage and debt loads in some sectors.

Trump has also singled out Powell on multiple occasions for continuing to support the rate hikes.

He noted that unexpected events can trigger recessions, but "I don't know what it will be" that might halt the current expansion.

His comments on their face appear more dovish than in early October, when Powell said, in reference to the Fed's interest rates, "we may go past neutral, but we're a long way from neutral at this point, probably".

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To that end, Trump, who chose Powell to replace former Fed chief Janet Yellen, has often bashed him and the Fed on Twitter and in interviews for the rate hikes. Bloomberg Economics anticipates three increases.

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