Federal Reserve Chairman Jerome Powell said the U.S. stock market's recent selloff doesn't pose major risks to the financial system, in a sign that the declines won't be enough to persuade the central bank to abandon its push to raise interest rates.
"It is important to distinguish between market volatility and events that threaten financial stability," Powell said on Wednesday, Nov. 28, in a speech in New York. "Large, sustained declines in equity prices can put downward pressure on spending and confidence. From the financial stability perspective, however, today we do not see dangerous excesses in the stock market."
A growing number of traders are betting that the Federal Reserve will slow its pace of U.S. interest-rate increases early next year, partly because of the drop in stock prices. Powell noted in his speech that while interest rates remain low by historical standards they are "just below the broad range of estimates of the level that would be neutral for the economy."
The central bank has been raising interest rates since 2015 to keep inflation from surging as the economy strengthened. The effort has drawn criticism from President Donald Trump, who has lobbed repeated criticisms at the central bank for raising interest rates too quickly, saying Powell is making a mistake that has unnecessarily impeded economic growth and damped enthusiasm in the stock market.
The Standard & Poor's 500 Index has tumbled 7.7% in the past three months, wiping out gains for the year, as traders fretted that the economic stimulus from Trump's $1.5 trillion of tax cuts last December might already be fading.
The S&P 500 was up 1.3% shortly after Powell's remarks were released.
Recent trading in futures markets shows that most traders still expect the Fed to increase rates in December, but speculation has waned that the central bank will hike its benchmark rate during the first half of next year.
The odds of an additional 0.25-percentage-point increase at the Fed's meeting next March have tumbled to 34% from 49% a month ago, according to data provider FactSet. And the chances of two quarter-point increases during the first half of next year have tumbled to 13% from 27%.
And while Powell has insisted that the central bank would raise rates at a gradual pace for the foreseeable future, recent underperformance in the stock market could give the Fed pause, according to analysts at the German lender Deutsche Bank AG (DB - Get Report) .
Yet in a separate speech on Wednesday, Richard Clarida, the Fed's vice chairman, rattled off a list of decision-making issues that didn't even include the recent drop in stock prices. Instead he emphasized the need for "data dependence," focusing on economic growth, inflation and the unemployment rate.
The Fed currently has set its benchmark for U.S. interest rates in a range from 2% to 2.25%.
Wall Street analysts say Trump's tax cuts spurred a burst of economic growth earlier this year, but recently signs have appeared that the effect of the stimulus may already be fading. The cost of the tax cuts, of course, is a widening federal deficit that has helped to balloon the national debt past $21.7 trillion, spurring fears that higher U.S. government interest payments could eventually become a drag on the economy.
Growth in U.S. gross domestic product slowed to 3.5% in the third quarter from 4.2% during the second quarter, and it's projected to slow to 2.6% during the last three months of the year. Economists surveyed by FactSet expect a further slowdown to 2.5% in 2019 and 2% in 2020 -- below even the 2.2% long-term growth rate projected prior to the enactment of the tax cuts.