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Powell’s Interest Rate Promise Leaves Barely a Ripple for Investors

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Investors hit a flat patch of track on the Wall Street rollercoaster following the Federal Reserve’s announcement Wednesday it would keep rates low for two more years. 

Screenshot of Federal Reserve Chairman Jerome Powell speaking Wednesday. (Image via Courthouse News)

MANHATTAN (CN) — The Federal Reserve’s vow to keep low rates steady through 2023 made its mark immediately but only ephemerally on markets.

Already slightly in the positive, the Dow Jones Industrial Average immediately jumped 300 points. It settled down shortly thereafter, however, gaining only 36 points, a 0.13% increase, for the day.

The S&P 500 and Nasdaq both had lesser increases earlier but then finished at a loss, with the former losing 0.47% and the latter dropping 1.25%.

During the last week and a half, Wall Street has suffered a devastating rout and an impressive rebound — with the wild swings driven mostly by fluctuating Big Tech stocks. 

Comparatively, Wednesday’s market was subdued for most of the day, as investors awaited further news out of the Federal Open Markets Committee.

As expected, the Fed kept its federal funds interest rate unchanged at 0% to 0.25% through 2023. Most economists believe the central bank will keep the rates that low until 2024 or even 2025.

Two of the Fed’s governors voted against keeping rates where they are: Dallas Fed President Robert Kaplan, who wanted the committee to “retain greater policy rate flexibility” past the 2% inflation point; and Neel Kashkari, who heads the Federal Reserve Bank of Minneapolis. 

Kashkari, a noted dove who has warned of a “long, hard road” for the U.S. economy and was an early detractor of the idea of a V-shaped economic recovery, wanted the Fed to maintain low interest rates until a 2% core inflation rate was reached “on a sustained basis.”

In its economic projections, the Fed predicts a median unemployment range of 5.5% next year, with it tapering off slightly over the next two years. The central bank also expects GDP to rise to as high as 5.5% next year — though its lower-end prediction has GDP at 0% growth in 2021 — before decreasing steadily over the coming years. 

During a press conference webcast immediately after the FOMC decision was announced, Fed Chairman Jerome Powell said that the economy is rebounding but the pace of the recovery will be slow.

“This very strong, very powerful guidance shows both our confidence and our determination,” Powell said. “We think that effectively saying that policy will remain highly accommodative until the economy is very far along in its recovery should provide strong support for the economy and get us there sooner rather than later.”

Powell’s comments follow the historic move by the central bank last month when it announced it was changing how it approached inflation and employment, sending markets into a rally. 

Instead of looking at employment from the perspective of “deviations from its maximum level” the central bank would focus on “shortfalls of employment from its maximum level.”

The Fed also said it would change how it addressed inflation, maintaining an “average inflation target” of 2% instead of a fixed inflation target of 2%. The new approach means inflation could dip significantly below or rise above that number for a period without Fed action.

Some worry the Fed’s new approach may be too malleable. “The Fed’s new ‘average inflation target’ strategy is not really an ‘average inflation target strategy,’” wrote Tim Duy, an economics professor at the University of Oregon, on Tuesday. “It means the Fed gets to make up the definition of success as they see fit. There is no fixed time associated with meeting the target, which means the target really isn’t a target.”

During his remarks, Powell rebuffed a few attempts to get him to clarify and sharply define its approach, instead noting the Fed would consider “broader labor conditions” in terms of approaching inflation and interest rates.

Powell did warn that while a Covid-19 vaccine would be a boon to the economy, social distancing and cheap and rapid testing are even more important right now.

“Right now, we’re learning to live with Covid, which still spreads, and we’re learning to engage with economic activity,” he said. “The more social distancing we can preserve as we go back into the workforce — wearing masks, keeping our distance, that sort of thing — the better we’ll be able to get economic activity back up to where it was.”

With the Fed’s announcement sucking most of the oxygen out of the room on Wednesday, a few other economic indicators got lost in the shuffle. Retail sales for August, which many experts had pegged at a 1% increase, rose only 0.6%. Additionally, the U.S. Census Bureau revised July’s retail numbers from 1.2% down to 0.9%. 

The biggest drops in retail spending remain electronics, which are down 16.8% from last year’s numbers, and clothing, which is down a whopping 35% from 2019. Sales of gasoline and furniture also are down double digits from last year.

Michael Hewson, chief market analyst at CMC Markets, said the drop shouldn’t come as too much of a surprise. “While the labor market may be proving to be more resilient than expected, it is clear that consumers are holding back from splashing the cash, as disposable income gets squeezed,” he wrote in an investor’s note.

On the flip side, sentiment among home builders rose significantly in September to a new all-time high. Builder sentiment jumped 5 more points to reach 83 on the housing market index, according to the National Association of Home Builders. The index had been steadily increasing since April, when it hovered at about 30 points.

The previous high point was 78 points in last 1998.

The rise in sentiment is despite a similarly large jump in lumber prices, which are now 170% higher than they were in mid-April. The increase has added about $16,000 to the price of an average single-family home, the association said.

“Historic traffic numbers have builders seeing positive market conditions, but many in the industry are worried about rising costs and delays for building materials especially lumber,” said NAHB Chairman Chuck Fowke in a statement. “More domestic lumber production or tariff relief is needed to avoid a slowdown in the market in the coming months.”

As pieces of the U.S. economy improve, however, the health situation regarding coronavirus remains dire. Now more than 29 million have contracted Covid-19 worldwide, according to data compiled by Johns Hopkins University, while roughly 936,000 have died. In the United States alone, about 6.6 million have been confirmed infected while almost 196,000 have died.