Stocks tumble after Fed raises rates again, lowers expectations for hikes next year

Date | 20-12-2018 - 10:18 AM Article Type | Stock Markets Region | World

Dow swings nearly 900 points in another volatile day of trade
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Decision day for the Fed

U.S. stocks closed decidedly lower Wednesday, after Federal Reserve Chairman Jerome Powell’s press conference that followed the central bank’s decision to raise interest rates by 25 basis points, while lowering the median forecast for rate hikes in 2019 to two hikes from three previously.

How did the benchmarks fare?
The Dow Jones Industrial Average  DJIA, -1.49% fell 351.98 points, or 1.5%, to 23,323.66, while the S&P 500 index SPX, -1.54% fell 39.2 points, or 1.5%, to 2,506.96. The Nasdaq Composite Index COMP, -2.17% tumbled 147.08 points, or 2.2%, to 6,636.83.

At its highs early Wednesday, the Dow had risen 381.7 points, the S&P was up 39.13 points, while the Nasdaq had advanced 84.95 points at its peak.

At its lows Wednesday afternoon, the Dow had fallen 513 points, the S&P 57.2 points, while the Nasdaq fell as much as 197.41 points at its nadir.

What drove the market?
U.S. stocks fell sharply after the Fed announced its fourth interest-rate increase of the year, hiking the federal funds rate by 25 basis points to a range of 2.25% to 2.5%, and deepened those losses during a press conference where Powell explained the decision and accompanying forecasts.

Recap: Fed interest-rate decision and Powell press conference

The policy statement was perceived as slightly more dovish than the central bank’s previous stance, as it modified its language to suggest it may be less aggressive in raising rates next year, while a survey of FOMC members shows the median voter expects two more rate hikes next year, rather than three hikes predicted at the Fed’s September meeting.

That said, the central bank left the necessity for “some further gradual increases” in the language of its policy statement.

Investors were expecting the rate hike, though some, including the Wall Street Journal’s editorial page as well as President Donald Trump, called for the Fed to pause amid signs of slowing economic growth.

Earlier, U.S. Treasury Secretary Steven Mnuchin gave investors reason for optimism regarding U.S.-China trade relations, when he said the U.S. and China will meet in January to broker a trade-war truce, in an interview with Bloomberg News on Tuesday. Previously, the Trump administration hadn’t given a specific timetable for face-to-face negotiations.

What did strategists say?
“The big takeaway for markets is that the Fed lowered its growth and inflation forecasts” for 2019 and beyond, at the same time that it continued to raise interest rates and otherwise tighten financial conditions, Matthews Bartolini, head of SPDR Americas research at State Street Global Advisors, told MarketWatch.

“The Fed is talking out of two sides of its mouth, and that just creates more uncertainty,” he added. “It’s telling the market it thinks growth will slow in the future while raising its forecast for unemployment in 2020, signaling they think there will be economic turmoil just 18 months from now.”

Powell’s press conference merely confirmed the bearish tone of the Fed’s economic forecast, Bartolini said. “It wasn’t a very positive delivery of the news. There was a lot of talk about cross-currents and headwinds from abroad,” or talk that one would expect to accompany a decision to keep rates where they are, rather than raising them, he said.

“I would characterize the Fed’s statement as dovish, but perhaps not as dovish as the market hoped,” said Peter Berezin senior vice president of global investment strategy at BCA research.

Investors are likely worried by the fact that the Fed declined to lower its estimates for where interest rates will be in 2020 and 2021. “What the Fed is saying is that they will eventually take monetary policy into restrictive territory. When that happens, the unemployment rises, and then usually you get a recession.”

Nevertheless, Berezin argued that traders likely initially overlooked the fact that FOMC members lowered their estimates for where interest rates will eventually settle, a dovish change that Berezin didn’t expect.

Author: PPS
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