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As reported by Bloomberg, bond traders may have gone too far in the other direction after Federal Reserve chairman Jerome Powell seemed to walk back recent comments about neutral rates. A couple of months ago, Powell commented that current rates were “far below” normal, and Wednesday’s “just below” normal threw bond traders into a selling fit, which may have been an overexaggerated reaction.

Key quotes

At one point on Wednesday traders were pricing in slightly less than a quarter point hike in 2019 after Powell said in a speech that the fed funds rate was “just below” neutral. That contrasts with his suggestion on Oct. 3 that rates were probably a “long way” from that point.

With nothing currently priced for 2020, markets are now effectively envisaging a one-and-done move next year, following an anticipated hike next month. That looks like too much of a pullback for some observers, who see the Fed revising its projections lower in December to a median of two hikes for 2019, from the current three.

The move down is an overreaction, according to Societe Generale economist Omair Sharif. He expects the Fed chairman was simply correcting a “rookie mistake” from last month, which at the time drove a spike in Treasury yields and a stock-market sell-off.

“I don’t think the recent ‘dovish’ Fed chatter suggests that they will hold off hiking unless the data deteriorate meaningfully,” Sharif wrote. “This repricing seems a bit extreme.”