Stocks surged and bonds sold off in a powerful move, after market pros took Fed Chairman Jerome Powell's comment to mean the Fed is nearing an end of its rate hiking cycle.
Powell said the Fed's key benchmark interest rate is near the neutral rate, or the rate where the Fed could consider stopping rate hikes. That's an important change from a comment he made in early October about the neutral rate being a long way off.
The Dow surged by more than 400 points, and the 2-year yield, most reflective of the Fed rate policy, sold off hard. The 2-year yield fell to 2.79 percent after reaching a high earlier of 2.85 percent.
"It's a game of semantics because after a rate hike in two weeks, the fed funds range is going to be 2.25-2.50 percent, and if 3 percent is neutral, then 2.5 is just below 3. The market is taking this as maybe we've got two hikes left, and we're close. It's a word game, but I think that's what people are latching onto," said Peter Boockvar, chief investment officer at Bleakley Financial.
BMO U.S. rates strategist Jon Hill said after Powell's comments, the futures market went from pricing in 1.6 hikes next year, to just above one full rate hike and a 25 percent probability of a second one. It's still pricing in a full December rate hike.
The Fed is expected to raise rates by a quarter point at its meeting Dec. 19, and has forecast three more hikes for next year.
Ward McCarthy, chief financial economist at Jefferies, said Powell is confirming the Fed's forecast. "They are shooting for 3 percent," he said. Neutral is the rate at which the Fed believes its benchmark interest rate neither stimulates or slows the economy, but what that level is has been the topic of much debate.
Some economists, including those at Goldman Sachs and JP Morgan Chase, have four interest rates hikes in their forecasts for next year.
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