Published: Sat, December 22, 2018
Money | By Arnold Ball

Fed Raises Rates Despite Trump Attacks, Stocks Tank

Fed Raises Rates Despite Trump Attacks, Stocks Tank

Jerome Powell sounded a note of humility Wednesday.

Following days of steep stock market losses, the president of the Federal Reserve Bank of NY sought to reassure investors that officials will listen to market signals in setting interest rates, emphasizing that their outlook for further gradual hikes is not set in stone. No longer will the Fed be able to signal weeks in advance the near-certainty of a shift in rates.

For now, most US economic barometers are still showing strength. And markets hate uncertainty. "So I do think that gives the committee the ability to be patient in moving forward". "Solid GDP growth at about 2.8% should continue in early 2019, but the LEI suggests the economy is likely to moderate further in the second half of 2019". Federal funds futures show traders believe the Fed won't raise rates at all in 2019, even though policymakers now see two rate increases as likely appropriate over the next 12 months.

His words, delivered in the chairman's characteristic calm baritone, were meant to be reassuring.

"We will continue to monitor global economic and financial developments and assess their implications for the economic outlook", Powell said at a post-meeting news conference.

The Dow Jones industrial average lost 415 points, or 1.8 per cent, and closed at 22,443. Surprises were rare. Yet that policy is less viable for Powell than it was for his predecessor, Janet Yellen, who presided over a series of rate increases from a record low in 2015.

This week, Trump fired off two tweets objecting to a likely rate hike.

In addition, the Fed has been gradually shrinking the vast portfolio of Treasury and mortgage bonds it built up after the 2008 financial crisis.

"The Fed behaving in a very prudent, balanced way increases the possibility of a very balanced expansion" continuing, he said.

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"The market overreacted to the Fed, I think", said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney.

Economists appear unified in the view that whatever the Fed does, it won't be influenced by the attacks Trump has made on the central bank and on Powell personally since the stock market began tumbling this fall. That's the point at which its key rate is thought to neither stimulate nor hinder growth. In Bloomberg's story, the reports are that aides are telling the president that firing the Fed chair could bring more chaos to the stock market. In Fed parlance, it will be "data-dependent". It's down 39 percent since late July on concerns about a slowdown in user growth, multiple privacy and safety scandals, as well as the possibility of increased regulation in the future.

European stocks rose after Italy's government reached an agreement with the European Commission on its budget plans.

Still, Piegza predicts the economy will avoid a recession in 2019.

Donald Trump doesn't look like he's getting $5 billion for a wall, and he's also not getting the break from Fed rate hikes he's been openly threatening for over the last few months.

But, it added, there would be fewer rate hikes in 2019, with the United States economy having been growing strongly and the job market improving. The Powell Fed inherited a balance sheet policy on automatic pilot that tends to exaggerate the market impact of any change in interest rate expectations. Instead, he has decided, beginning in 2019, to hold news conferences after each of the Fed's eight meetings each year, rather than only quarterly. But it also raises the risk that the Fed will jolt financial markets by catching them off guard. In his post-meeting press conference, Chairman Powell acknowledged that while the recent unrest in the financial markets has contributed to tighter financial conditions and global growth has moderated, USA growth is nonetheless expected to be "solid" in 2019.

Despite the losses, David Kelly, the chief global strategist for JPMorgan Funds, said the market will ultimately react to the health of the economy.

December 18: Easy credit, thanks to aggressive monetary policy, was one of the key catalysts that drove the equity bull market over the last decade.

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