The Federal Reserve chairman declared US interest rates were closing in on "neutral" levels, compared to equity markets. "Best day since investors interpreted the comments as a signal the central bank is preparing to slow down its rate-rising program."
While he defended the Fed's recent grad rate hikes, Jay Powell said the central bank will be watching new economic data very closely as monetary policymakers decide what to do next.
Estimates of neutral rates are hovering – the level that neither causes growth to accelerate nor to slow down – the Fed chair said, a possible sign that polymymakers may decide they don't need to lift them much further.
"There is a policy path preset number," Mr. Powell said. "We will pay very close attention to what incoming economy and financial data are telling us."
The comments at the Economic Club of New York on Wednesday came as he faced intensifying the White House pressure to hold back from further rate rises. President Donald Trump this week told The Washington Post the Fed, which is expected to lift rates for a fourth time this year, "is the way off base with what they're doing".
Mr. Trump added: "So far, I'm not even a little bit happy with my selection of Jay."
The markets reacted sharply to Mr. Powell's comments, which contrasted with an assessment he gave last month. Early October, said rates were a "long way from neutral levels, triggering a sell-off as fretted Fed investors were preparing for a long succession of rate increases.
The S & P 500 closed up 2.3 per cent on Wednesday, its best day in eight months, having jumped a full percentage point after Mr Powell's speech. The Dow Jones Industrial Average extended its gains to end 2.5 per cent higher and the Nasdaq Composite was up 2.9 per cent.
There was a pronounced weakening of the US dollar after the speech, gyrated government bonds. By late afternoon in New York, the 10-year US Treasury yield on the benchmark was flat at 3,059 per cent, but the yield on the more policy-sensitive two-year note was down 2 basis points at 2,813 per cent.
In his speech, Mr. Powell did not directly refer to Mr. Trump's criticisms. But he insisted the Fed had been right to embark on a gradual rate after it was well served by the extraordinarily low rates that prevailed after the 2008 financial crisis.
"The rates are still low by the historical standards, and neither is speeding up nor slowing down growth," Mr Powell said. "My FOMC colleagues and I, as well as many private sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 per cent."
The Fed's gradual pace of rate rises in exercise in balancing two risks, Mr. Powell added.
"Moving too fast would risk shortening the expansion," he said. "We also know that moving too slowly interest rates too low for too long – could risk other distortions in the form of higher inflation or destabilizing financial imbalances."
The speech came after the release of the Fed's new Financial Stability Report. He said overall indebtedness in the financial system was not "abnormal or excessive". Even though some asset valuations were high, the Fed did not see "dangerous excesses" in the stock market.
The Fed chairman also offered a favorable view of financial market risks, saying that while polymymakers were keeping an eye on areas including rising corporate indebtedness, the overall system was resilient. The Fed's latest financial health checks are suggested that "everything is considered you are in good health," Mr Powell said.
The principal area for worry was corporate lending, where firms with high debts and interest from the burdens had been boosting their most borrowing, and loan underwriting quality measures had been deteriorating.