Fed raises rates, but dials back plans for future hikes

Anna Jefferson
December 22, 2018

Trump made these remarks as the stock market has dropped significantly over the past two months. The Japanese Nikkei declined 1.1 percent.

China's benchmark Shanghai Composite and the blue-chip CSI 300 fell 0.8 per cent and 0.9 per cent, respectively, while Hong Kong's Hang Seng was off 0.7 per cent.

The S&P 500 Index whipsawed throughout the day in heavy trading before closing at a 15-month low as investors debated whether the Fed set up the central bank for a policy error. S&P and Nasdaq are having their worst December since 1931 - during the Great Depression. The central bank said it was closely watching "global economic and financial market developments".

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

Wednesday's quarter-point increase, to a range of 2.25 percent to 2.5 percent, lifted the Fed's benchmark rate to its highest point since 2008. The Fed's move on Wednesday to largely adhere to its plan for more rate hikes over the next two years and keep its balance sheet reduction plan on "autopilot" spooked investors already anxious about slowing economic growth.

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The Australian sharemarket finished a wild session in the red at a fresh two-year low as markets responding negatively to U.S. monetary policy tightening and rising tensions between China and the United States and its allies. US crude oil slipped 0.6 percent to $45.59 a barrel in NY. Yields turned negative as treasuries popped, while the yield on the 30-year U.S. Treasury dropped below 3% - the first time in almost three months. To put things into perspective, Central Banks are known to gradually increase interest rates so as to slow down the economy as and when inflationary signs start to appear.

Historically, an inversion between short-yields, such as three-month and two-year yields, and 10-year yields has been seen as a fairly reliable indicator of a recession down the road. It leaned heavily on managing risks around topline macroeconomic data like the unemployment rate, not how stocks are faring in a $20 trillion economy that would need more than the lost paper wealth of a few bad trading days to knock it off course. Wren said investors want to know that the Fed is keeping a close eye on the situation.

The Dow lost 638 points, or 2.7 per cent, to 22,687.

In September, the Fed predicted it would do three more interest rate hikes in 2019. That hasn't happened yet, but investors fear it will. Inversions are often taken as a sign a recession is coming, although it's not a ideal signal and when recessions do follow inversions in the yield curve, it can take a year or more.

After nearly 10 years, Wall Street's rally looks like it's ending.

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The dollar stood at 112.50 yen, bouncing back from a seven-week low of 112.09 touched just before the Fed. "These hopes were disappointed", Menke said.

In particular, his speech that day noted that, even if the longstanding connection between very low unemployment and high inflation seems to have been broken, it would be risky for a central banker to ignore the risk that it could reemerge, and force a recession-inducing run-up in interest rates. It fell $2.89 the previous session to $54.35. It was a day of mixed messages that failed to ease investor concern that the central bank is making a policy mistake.

The rate hike should dampen investors' interest as well as their appetite for riskier investments, said Jorge Mariscal, Chief Investment Officer at UBS Global Wealth Management.

Oil Search, Woodside reversed early losses after the oil price bounced 0.8 per cent, and Santos was down 0.2 and one per cent.

The front-month US crude contract dropped 1.8 per cent to $47.32 per barrel, while global benchmark Brent crude futures were down 1.3 per cent at $56.50 per barrel.

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