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Parsing Fed Chief Powell’s Words: Dove, Hawk or Somewhere in Between?

Signs, data of further acceleration in wages, inflation could still likely result in rate hikes

Can just two words change investors’ sentiment about markets?

With his speech Wednesday, November 28 at the Economic Club of New York, Federal Reserve Chairman Jerome Powell may have provided markets with the salve they were looking for. While the speech was mostly focused on financial stability and publication of the Fed’s first Financial Stability Report, Powell did say during a brief opening overview of the outlook for the economy that interest rates are “just below” a level that would be neutral.

Following the speech, U.S. stocks extended gains from earlier in the session and most risk assets rose. Bond yields also declined, sending Treasury prices higher on the apparent shift in stance that the Fed may be considering pausing in its current interest-rate tightening cycle.

“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, in the speech.1

In early October, Powell was more hawkish on the direction of interest rates, saying “we may go past neutral, but we’re a long way from neutral at this point, probably.”2 Those comments helped spur a selloff across global markets in the following weeks.2

Indeed, going into the week of November 26, the S&P 500 had wiped out all of its gains for the year, down by 1.5%. And from its closing high on September 20, it had lost 10.2% through November 23. The broad retreat from other large non-financial company stocks and technology shares was also evident in the 14.6% decline in the Nasdaq 100 from a near recent high on October 1.

Since then, however, stocks have rebounded with the S&P 500 up 4.2% through November 28 from its close on November 23. During the same period, the Nasdaq 100 has gained nearly 6.0%.

More On Being Neutral and Natural

Powell’s mention of the neutral rate refers to economists’ assumptions that, in the long-run, nominal interest rates (not inflation-adjusted) will tend toward some equilibrium, or “natural,” real rate of interest plus an adjustment for expected long-run inflation.3

In other words, the neutral rate of interest isn’t something that can be measured. It’s the rate at which real (or, inflation-adjusted) gross domestic product (GDP) is growing at its trend rate and inflation is stable, according to this definition from the Financial Times. Economists tend to believe it to be around 5%, though firms such as Morgan Stanley, estimate that it is currently under 3%.4

According to the Hutchins Center on Fiscal and Monetary Policy, part of the Brookings Institution, the neutral rate of interest is the short-term rate that would prevail when the economy is at full employment and stable inflation: the rate at which monetary policy is neither contractionary nor expansionary.

“It matters because it affects how the Fed judges whether the interest rates it sets are stimulating or restraining the economy,” the Hutchins Center’s research analyst Michael Ng and director David Wessel write.5

Will the Fed Really Pause if Signs Emerge of Wage Pressures?

But can just two words about the level of interest rates being “just below” estimates of the level that would be neutral for the economy be enough to suggest that the Fed may pause? Can they be the fuel that drives markets higher for the remainder of the year? After all, labor markets remain tight, a condition that could result in further wage pressures.

The Bureau of Labor Statistics (BLS) reported in late October that wages and salaries for civilian workers rose 2.9% for the 12-month period ending in September 2018.6 In addition, the JOLTS (Job Openings and Labor Turnover Survey) quit rate, a measure of those who leave jobs willingly, remained at 2.4% in the most recent report from the BLS.7

(See also the chart below, retrieved from the Federal Reserve Bank of St. Louis, which shows the JOLTS quit rate steadily rising in recent months.)



A high quits rate is an indicator of workers’ confidence in the economy to quit jobs they feel may not be right for them and to search for ones that are. It means a stronger labor market, where job opportunities abound and workers can find a better match, according to the Economic Policy Institute.8

Markets are currently pricing in a more than 80% probability of another quarter-point increase in short-term interest rates when the Fed meets this coming December, according to the CME Group’s FedWatch Tool, as of November 29. In its projections released back in September, the Fed forecasted another one percentage point rise in interest rates through 2019, or as many as four quarter-point rate hikes.9

The outlook for 2019, though, is what market participants seek more clarity on. In the speech on November 28, Powell said that the economic effects of the Fed’s gradual rate increases are uncertain, and may take a year or more to be fully realized.

“While FOMC [Federal Open Market Committee] participants’ projections are based on our best assessments of the outlook, there is no preset policy path. We will be paying very close attention to what incoming economic and financial data are telling us,” Powell said.


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1 The Federal Reserve (2018, November 28). The Federal Reserve’s Framework for Monitoring Financial Stability. Chairman Jerome H. Powell At The Economic Club of New York, New York, New York. Retrieved from

2 Goldstein, Steve (2018, November 28). Seemingly dovish, Powell says interest rates are ‘just below’ level where they won’t stimulate economy. MarketWatch. Retrieved from

3 Williams, John (2003, October 31). The Natural Rate of Interest. Federal Reserve Bank of San Francisco Economic Letter. Retrieved from:

4 Financial Times. Definition of neutral rate of interest, Retrieved from

5 Ng Michael, Wessel David. The Hutchins Center Explains: The neutral rate of interest. Up Front: The latest analysis by Brookings experts of current events and breaking news. Retrieved from:

6 Bureau of Labor Statistics (2018, October 31). Employment Cost Index—September 2018 [Press Release]. Retrieved from

7 Bureau of Labor Statistics (2018, November 6). Job Openings And Labor Turnover—September 2018 [Press Release]. Retrieved from

8 Economic Policy Institute (2016, February 9). When quitting is a good thing. Working Economics Blog. Retrieved from

9 Federal Reserve. (2018, September 26). Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, September 2018 [Projection Materials]. Retrieved from:

Chart Source:

U.S. Bureau of Labor Statistics, Quits: Total Nonfarm [JTSQUR], retrieved from FRED, Federal Reserve Bank of St. Louis;, November 29, 2018.

Sources for Financial Data

S&P 500:

Nasdaq 100:

CME Group FedWatch Tool:


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