U.S. Federal Reserve Governor Lael Brainard Monday apparently allayed investors’ fears, saying today’s “new normal” requires moderation in developing interest rate policy.
Her remarks to the Chicago Council on Global Affairs sent stocks soaring, recouping nearly half the losses incurred Friday when remarks by other Fed figures sparked fears the Fed’s Open Markets Committee would hike interest rates at next week’s meeting.
Fed Chair Janet Yellen has signaled an interest rate hike is coming but has been vague on the timing.
Brainard is considered the most dovish among the Fed governors. Investors had speculated more hawkish remarks in Monday’s speech would have signaled an imminent increase at the end of the Sept. 20-21 meeting. Her remarks are the final word before next week’s meeting.
“I think circumstances call for a lively discussion next week,” Atlanta Fed President Dennis Lockhart, who will not be a voter at next week's policy review, told Reuters.
Brainard said the slow growth of the economy demands “a correspondingly moderate policy response.” She said the Fed must recognize its “toolkit” in the face of low inflation and a slack labor market is limited should the economy weaken. The days of rapid growth are over in the wake of the Great Recession, she said.
“I would argue that policy today must rely less on the old normal as a guidepost and instead be sensitive to the contours that shape today’s ‘new normal,’" she said, adding it might be time for the Fed to consider neutral interest rates, which neither boost nor slow the economy.
The remarks sent the Dow Jones Industrial Average up 1.32 percent to 18,325.07. The Standard & Poor’s 500 and the Nasdaq gained even greater percentages. The S&P rose 1.47 percent to 2,159.04 while the Nasdaq soared 1.68 percent to 5,211.89. The S&P gain was the most in two months and followed a 2.5 percent drop Friday.
The dollar fell for the first time in four sessions while the 10-year Treasuries were little changed. Phone companies gained 2 percent while Staples (NASDAQ:SPLS) shares were up 1.9 percent and Apple Inc. (NASDAQ:AAPL) jumped 2.2 percent.
“The market is hooked on any words coming out of the Fed. Some recent economic reports have made people challenge the wisdom of another rate increase this year,” Kully Samra of Charles Schwab Corp. told Bloomberg.