Powell surprises with dovish speech

Fed Chairman Jerome Powell went off the script and delivered a speech that indicates he's not likely to continue with gradual rate hikes next year.

Powell hardly mentioned a gradual pace of rate hikes and when he did it was generally in the past tense. At the same time, he said rates aren't on a preset path and highlighted incoming economic data.

The US dollar fell 40 to 70 pips across the board. The S&P 500 is up 40 points compared to 12 before the speech. US 10-year yields are down 3 bps to 3.05%.

Powell doesn't mention energy in his speech but the drop in oil prices will cut inflation and more importantly, it will lower inflation expectations. That helps to buy time for the Fed to wait-and-see on the impact of rate hikes so far.

Here's the key comment in his speech.

"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."

Contrast that with what he said on October 3:

"We may go past neutral, but we're a long way from neutral at this point, probably."

Probably not, evidently.