Economy

Wall Street rises ahead of Fed interest rate decision

Wall Street rises ahead of Fed interest rate decision

The S&P 500 Index dropped 1.5 per cent after policymakers raised rates for the fourth time this year and lowered their forecast for hikes next year to two from three. As bad as the swings have felt, the S&P 500 Index is down about 8 percent in 2018 - a long way from its worst year. For instance, while the government might want lower interest rates to gratify its constituency of business and individual borrowers, the central bank's objective is to balance inflation rates and growth by keeping the money supply under control.

European markets fared worse though, with France's Cac 40 down by 1.8%, Germany's Dax off 1.4%, Italy's MIB down 1.9% and Spain's Ibex by 2%.

China's benchmark Shanghai Composite and the blue-chip CSI 300 fell 1.3 percent and 1.5 percent, respectively, while Hong Kong's Hang Seng was off 1.5 percent.

Unless a miracle "Santa Claus" rally emerges, this is going to be the worst year for U.S. stocks since 2008.

Some, including me, expressed concerns about the risks and unintended consequences of central banks continuously "goosing" markets.

Answering questions during the press conference, Mr Powell said political considerations play no role in Fed policy making. Powell's comments about continuing to shrink the Fed's $4 trillion balance sheet particularly spooked investors.

Powell did bow to what he called recent "softening" in global growth, tighter financial conditions, and expectations the U.S. economy will slow next year, and said that with inflation expected to remain a touch below the Fed's 2 per cent target next year, policymakers can be "patient".

But the slight revision was not enough to ease market fears over a further USA economic slowdown on the back of trade tensions, a waning boost from tax cuts and tightening monetary conditions for companies.

US junk bonds sold off sharply, with their ETFs falling 0.9 percent, the biggest decline since March 1. "Given this outlook, it's no surprise that they raised rates by 0.25 percent, up to 2.5 percent overall", Brian Leni, founder of Junior Stock Review, told the Investing News Network.

Those are more acknowledgments that rates are moving closer to the point where policy makers will at least take a break from the quarterly procession of hikes they pursued throughout 2018.

US Fed raises interest rates, signals more hikes ahead
Asian markets slump after Fed hikes rates

It noted that "some" further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs. The structure of the US Federal Reserve System and other global central banks is such that governments have very little influence on them which makes it hard for them to sway monetary policy.

Inflation, which hit the central bank's 2 per cent target this year, is expected to be 1.9 per cent next year, a bit lower than the 2.0 per cent forecast three months ago.

As one 25 basis point rate hike would likely invert the yield curve, many market players are sceptical whether the Fed can raise rates at all next year.

"There is no doubt that markets were expecting a bailout from the Fed - and threw a tantrum when they didn't get it", Brad McMillan, chief investment officer at Commonwealth Financial Network, said in a note Thursday. The dollar, weaker on the day before the decision, regained some ground against most major currencies.

The Stoxx Europe 600 recovered some losses but closed broadly lower, while Japanese shares slid into a bear market.

The Chinese yuan weakened after China's central bank introduced a targeted lending measure on Thursday to support growth in a slowing economy. This will allow him to explain any abrupt policy changes.

Later in the day, United Kingdom and Sweden will make policy announcements.

The Bank of England voted today unanimously to hold the Bank Rate at 0.75 percent, saying that Brexit uncertainty had "intensified considerably" over the last month while inflation is expected to ease below the 2 percent target soon amid falling oil prices.

On Friday, the benchmark NY rate was down 1.4 per cent at $45.24 a barrel while the worldwide standard, Brent, declined 2.7 per cent, to $52.91.

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