Fed's Powell: Financial risks 'moderate' despite vulnerabilities

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"Clearly, Powell's comments about where the neutral interest rate is has created a shift in market expectations with respect to Fed policy", said Jane Foley, a senior currency strategist at Rabobank in London.

"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 said.

The dollar weakened against other major currencies on Thursday as markets took Federal Reserve Chairman Jerome Powell's comment that US interest rates were just below neutral as a signal that a three-year rate-hiking cycle is nearing an end.

The report even highlighted the Fed's own policy decisions as a risk, saying markets globally needed to adjust to rising interest rates, and "some adjustments could occur abruptly".

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Under the leadership of Fed Chair Jerome Powell, appointed by Trump as an independent regulator, Fed officials have relaxed some rules put in under the 2010 law enacted by President Barack Obama and the then-majority Democrats in Congress, aimed at preventing a recurrence of the crisis and massive taxpayer bailout of USA banks.

Powell also noted that it is important to distinguish between market volatility and events threatening financial stability.

Powell's remarks came a day after President Donald Trump reiterated criticism of Powell, telling The Washington Post he was "not even a little bit happy" with the Fed chairman. I'm not going to say it's so much Trump ー that Trump has been sending mean tweets about Chairman Powell. "Not even a little bit", Trump told the Washington Post. Trump has called the Fed "crazy" and "ridiculous".

He argued that rising interest rates and other Fed policies were damaging the economy - as evidenced by GM's announcement this week that it was laying off 15 per cent of its workforce - though he insisted that he is not anxious about a recession.

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"I'm doing deals and I'm not being accommodated by the Fed", Mr Trump told the Post. But signs of a slowdown overseas and almost two months of market volatility - including a sharp selloff last week - have clouded an otherwise mostly rosy US picture in which the economy is growing well above potential and unemployment is the lowest since the 1960s.

The report is the first of what the Fed intends as a twice yearly review of risks to financial stability, defined as the degree to which the financial system can continue to lend to businesses and households even when subjected to an outside shock.

The report detailed four major risks factors to the stability of the economy: excessive leverage in the financial sector; funding risk, which refers to financial entities relying on sources of funding that can be rapidly withdrawn; excessive leverage in businesses and households; and overvaluation, known in extreme cases as a bubble.

"I would not be surprised if they go with one more hike in December and then pause indefinitely to see what happens to the economy", Sohn said. Powell, in his speech, said his overall view is that "financial stability vulnerabilities are at a moderate level".

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