Global markets are plunging as the Fed’s ‘hawkish tone’ steals Christmas

Muriel Colon
December 22, 2018

Amid the recent volatility in stocks and other risky assets, US President Donald Trump had stepped up pressure on the central bank to avoid more tightening in the run-up to the announcement. The president has complained that the moves are threatening the economy.

But another message was clear in the policy statement issued after the Fed's last meeting of the year and Powell's comments: The US economy continues to perform well and no longer needs the Fed's support either through lower-than-normal interest rates or by maintaining of a massive balance sheet. "We at the Fed are absolutely committed to that mission and nothing will deter us from doing what we think is the right thing to do".

The decision aligned with the expectations of traders and investors in the market: The Dow Jones Industrial had increased about 0.023 percent as of time of writing, while the S&P 500 had increased 1.11 percent. Bond prices surged, though, sending yields lower.

Global financial markets, including Wall Street stocks, had been hoping for a more dovish policy outlook and sold off broadly.

The Federal Reserve periodically raises interest rates during periods of economic growth to prevent inflation from getting out of control.

The U.S. economy has given off mixed signals.

Three years ago, the Fed began moving away from the near-zero rate that had been in place since the peak of the global financial crisis.

December 20: It remains our view that the performance of the SPX index suggests that the current corrective phase poses an even greater threat to the long-running USA equity bull market than did the 2014-16 correction. They fear that continued increases in interest rates will slow the economy too dramatically.

Powell emphasised that Fed's policy decisions are not on a preset course and will change if the incoming data materially changed the outlook.

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Powell acknowledged the shift in the Fed's strategy. "We're always going to be focused on the mission that Congress has given us", said Powell.

"I think that markets were looking for more in terms of the pause", said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. But now, the risks of a surprise could rise.

On Thursday, Japan kept its policy settings unchanged, as expected. But it also raises the risk that the Fed will jolt the markets by catching them off guard. Contributing to this perception is Powell's view that rates appear to be just below the level the Fed calls "neutral", where they're thought to neither stimulate growth nor impede it.

First Trump declared himself a "Tariff Man", promising to inflict as much economic pain as possible - a move that horrified investors.

The unemployment rate is estimated to be 3.5 percent next year, unchanged from the previous forecast, and 3.6 percent in 2020.

While the Fed continues to forecast solid growth, new government data released Friday revealed that falling exports and slower consumer spending and business investment are putting the brakes on economic growth in the second half of the year, while inflation is again falling. He said the Fed was wrong when it raised rates earlier this year, and on Tuesday he tweeted: "Feel the market, don't just go by meaningless numbers". "He understands that if the economy remains strong, he'll be re-elected".

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective.

The rate peaked at 2.4 per cent in July, but has move downwards since. The fact that the USA is a net importer also implies that a slowdown would be transmitted in the rest of the world, and especially in China and Europe. And continuing trade tensions between the USA and China have led to growing fears about the outlook for the global economy. The benefit of that stimulus will likely fade in 2019, slowing growth to a more modest pace. Auto and home sales have slumped as interest rates have climbed.

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