Published: Fri, March 22, 2019
Money | By Arnold Ball

Dow drops more than 100 points amid Fed announcement

Dow drops more than 100 points amid Fed announcement

The Fed policymakers, emerging from a two-day meeting, also projected that the USA economy would grow more slowly this year and next, a change from the panel's projections just three months ago. It says traders now put the probability of any Fed rate hike this year at zero and project a one-in-four chance that the Fed will actually cut rates by year's end to help prevent a slowing economy from toppling into a recession.

"The U.S. central bank said today that the policy of not raising interest rates will continue". And it's not as if, in the run-up to this week's Fed meeting, markets hadn't already priced in a very accommodating monetary policy, with stocks up 12 percent for the year, yields lower, and volatility in the markets for U.S. Treasuries at a historic low. In regard to its balance sheet, the Fed said it would slow its decreases of the asset portfolio and end runoff of Treasury holdings in September, according to the Wall Street Journal.

The Federal Reserve's Open Market Committee on Wednesday left its target rate unchanged at 2.25 percent to 2.5 percent. As a result, the benchmark-funds rate will remain between 2.25 percent and 2.5 percent.

"The markets believe that with the Fed on hold the economy will start to show improvement", said Carin Pai, executive vice president at Fiduciary Trust Company International, based in NY.

Bank stocks fell broadly along with rates, with the S&P 500 financials sector down more than 2 percent, weighing on the market.

Fed members changed their outlook for 2019 from the two increases predicted in December to no movement.

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Indeed, Federal funds futures now see almost even chances that the central bank will cut interest rates in early 2020.

Benchmark U.S. 10-year notes last fell 1/32 in price to yield 2.5387 percent, from 2.537 percent late on Wednesday. The Fed increased rates four times a year ago and three times in 2017.

The decision to halt rate hikes will likely please President Trump, who, following the Fed's December announcement, lambasted Chairman Jerome Powell for threatening the bull market he's enjoyed since taking office.

Mr Powell said the outlook for the US economy was positive, however he said economic risks were rising, including Britain's exit from the European Union and the US-China trade dispute.

A day after the Fed flagged an economic slowdown, US data showed jobless benefit applications fell more than expected while mid-Atlantic factory activity rebounded, triggering gains in technology stocks, and the Wall Street benchmark closed at its highest in over five months. Indeed, Powell went out of his way to be positive about the US outlook, repeating several times that the economy is in "a good place" and stating that the underlying growth fundamentals are very "favorable". "Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. overall inflation has declined". "The question for the market remains whether or not the four rate hikes from past year and the unwinding of the balance sheet at the same time could be continuing, even now, to tighten financial conditions".

Powell pushed back on that view, saying the USA economy is in a "good place" and that the outlook is "positive". The exact mix will matter a great deal down the road, given that the Fed opted this week to sacrifice policy flexibility for 2019 in favor of giving bullish investors exactly what they desired.

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