Fed Chief's Rate Rise Remarks Not as Dovish as Market Inferred
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Federal Reserve Chairman Jerome Powell.

A day after remarks by Federal Reserve Chairman Jerome Powell sent U.S. stocks soaring by the most in eight months, some economists argue the enthusiasm was misplaced.

Powell's speech kindled speculation among traders that the central bank might halt or pause its three-year-long push to raise U.S. interest rates in early 2019. Since higher interest rates usually act to slow down economic growth, traders read the comments as bullish for corporate profits, and the Standard & Poor's 500 Index shot up by 2.3%. 

But Torsten Slok, chief international economist for the German lender Deutsche Bank AG (DB) , wrote Thursday in a report that the unusually low U.S. unemployment rate -- currently at 3.7%, a level not witnessed for nearly a half-century -- will force employers to raise wages for workers, in turn fueling inflation, since many businesses will try to pass along the higher costs. And the Federal Reserve will have to continue raising interest rates to keep consumer prices from spiraling out of control, according to Slok. 

"We run the risk of returning to 1970s-style unanchored wage inflation with an associated bear market in both bonds and equities," Slok wrote.

The S&P 500 slid 0.3% on Thursday to 2,734. 

Traders focused on Powell's comment that interest rates are "just below the broad range of estimates of the level that would be neutral for the economy." As recently as Oct. 3, Powell had said that interest rates were "a long way from neutral at this point, probably." 

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.

Ian Shepherdson, chief economist at the forecasting firm Pantheon Macroeconomics, says the "broad range of estimates of neutral" goes from 2.5% to 3.5%. So with the Fed's benchmark rate currently set in a range of 2% to 2.25%, there's a lot of wiggle room -- especially since the central bank has only been increasing the level at a pace of roughly 0.25 percentage point every three months.  

"The top of the target range, therefore, is only one hike away from the bottom of the range, but it remains three hikes from the middle of the range and five from the top," Shepherdson wrote late Wednesday in a report. The emphasis was his.  

Eric Winograd, a senior economist at the money manager AllianceBernstein Holding LP (AB) , says Powell's shift in verbiage was largely "semantic." Winograd said he still thinks the Fed will raise rates at a meeting in December, followed by four more quarter-point increases in 2019. 

The recent drop in oil prices may reduce some of the upward pressure on inflation, in turn giving the Fed more flexibility to slow its pace of interest-rate increases, Winograd wrote in e-mailed comments.

"That said, my forecast is still for no pause next year," he said. 

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