Economy

Mnuchin says market's negative reaction to Fed 'overblown'

Mnuchin says market's negative reaction to Fed 'overblown'”

Goldman Sachs economists said on Thursday they expect between one and two Fed rate hikes next year, down from three just a little more than a week ago.

"Despite many signs of global economic growth slowing, the Fed does not seem to be very concerned at this stage suggesting that monetary policy will continue to tighten albeit at a slower pace than previously projected", he continued.

All major indices closed at fresh lows for the year as the tech-weighted Nasdaq shed 1.6 percent to close near bear-market territory - a dubious distinction marking a 20 percent drop below a previous high - due to the end of the easy-money era.

Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said Fed Chairman Jerome Powell didn't appear concerned about the state of the US economy despite deepening worries among investors that growth could slow even more.

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"Given the stock market declines and negative worldwide economic news - recognised in the statement - this still points to quite a bit of confidence at the Fed in the ability of the U.S. economy to withstand a few more rate hikes", said Brian Coulton, chief economist at Fitch Ratings.

Yesterday, the Fed said "some" further gradual rate increases were likely. But even with the Fed's latest rate increase, mortgage rates are low compared to historical averages, and financial conditions remain loose even if they have grown slightly less so in recent weeks.

But like anyone seeking a compromise, Powell ended up making few people happy.

It was not the widely-expected rate hike itself that gave investors a headache so much as forecasts released by the Fed about what it expected to do next year. "If it had been more hawkish, investors would have anxious. the Fed would kill off yet another recovery".

Bond prices rose, sending yields sharply lower. The Russell 2000 index, which has suffered broader declines than the rest of the market, fell 27.95 points, or 2 percent, to 1,349.23.

The Standard & Poor's 500 lost more than 2.2%, having been up 1.4% prior to the decision of the Federal Reserve. From its peak in November, the gauge has tumbled 14.5 percent.

"I think investors are positioning themselves for a year-end rally, because in the short term markets are over-sold", said Matt Watson, portfolio manager with James Advantage Funds in Alpha, Ohio.

It will mean higher costs for business loans, balances on credit cards, vehicle loans, and home equity loans. But markets reacted badly after chairman Jerome Powell said the bank would not shift course on reducing its balance sheet.

Currency traders took the Fed's lowering of expectations for future hikes as a somewhat dovish turn.

The central bank defied President Donald Trump's public statements and tweets, and pulled the trigger on a December rate hike, raising interest rates 25 basis points to a target range of 2.25% and 2.50%.

Investors may hope for a Fed "put" to support nervous markets, but so far the central bank remains comfortable with even higher rates, and a steady, $50 billion monthly decline in its balance sheet.

Committee members also adjusted the estimate for the neutral level for the fed funds rate to 2.75 percent from 3 percent. The Dow is up 18 per cent under Trump, compared with 45 per cent at this point under Obama, according to Bespoke Investments. The leading USA stock index ended the trading session 500 points lower for a new closing low for the year. The report said Facebook had arrangements with more than 150 companies including Microsoft, Amazon, Spotify and Netflix that some companies read, write and delete users' private messages or see the names of a user's friends or their news feeds without their consent. In fact, they now expect a rate cut in 2020.

While there were concerns over the Fed's outlook for more interest rate hikes given some signs of a slowing United States economy and the long-term effect of the recent rate-hike cycle, there is another impact that will hit your wallet nearly immediately. "The U.S. economy has momentum.This is not a group that is overly concerned about financial market volatility".

Well, Trump knows it's bad, hence his reluctance to accept the Fed's actions.

"Political considerations have played no role whatsoever in our discussions or decisions", he said.



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