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Stocks Tumble After Fed Signals Interest Rate Hikes Will Continue Stocks Tumble After Fed Signals More Rate Rises in 2019
(about 2 hours later)
Stocks fell on Wednesday, erasing early gains after the Federal Reserve signaled that it plans to keep raising interest rates next year. It wasn’t what stock market bulls were hoping for.
The S&P 500 stock index, which had been up more than 1 percent before the Fed’s 2 p.m. announcement, quickly turned lower after the central bank raised its key short-term interest rate by a quarter-point. Stocks tumbled on Wednesday after the Federal Reserve, citing the strength of the economy, signaled that it planned to keep raising interest rates and shrinking the extraordinary amount of support it has provided to financial markets in the decade since the financial crisis.
It was widely understood that the Fed would raise interest rates again, but policymakers had also been expected to calm jittery investors by emphasizing that further rate increases in 2019 would depend on sustained economic growth. Instead the Fed and its chairman Jerome H. Powell highlighted the strong economy and indicated that interest rates will rise two more times next year as growth continues. The S&P 500 stock index finished 1.5 percent lower, bringing its losses for the month so far to 9.2 percent. The benchmark had been higher ahead of the Fed’s 2 p.m. announcement about interest rates and a news conference that followed.
Concerns about slowing global growth, due in part to the trade war between the United States and China, have been at the heart of this year’s global sell-off for stocks. Investors have been highly reactive to any indication of the Fed’s intentions, as they worried that rising interest rates would erode corporate profits and hoped the central bank may offer them a reprieve by slowing the pace of its increases. The central bank raised its benchmark interest rate another quarter percentage point.
That increase had been widely predicted. But in the financial markets, hopes had been high that the Fed would simultaneously signal its growing concern about the outlook for economic growth.
Such an outlook is known as “dovish” in financial market jargon. And there had been broad consensus among stock market analysts that the Fed would announce a “dovish hike” — that is, an increase paired with language that indicated it would slow the pace of tightening substantially — on Wednesday.
They were disappointed.
“There was no give,” said Tony Dwyer, chief market strategist with the brokerage firm Canaccord Genuity in New York. “You were looking for a dovish hike. And it turned out to be just a hike.”
The Fed did acknowledge growing expectations that the world economy could be slowing. Chairman Jerome H. Powell emphasized that the bank would tailor its policy in response to economic data.
But generally, the central bank highlighted the ongoing strength of the American economy, a reason not to ease off interest rate increases too fast. Unemployment is near 50-year lows, growth in 2018 has been the fastest in years, and even as stock markets have sold off sharply, incoming numbers show little indication that the economy is turning sour.
“The Fed message to the markets is, take a breath,” said Brian Belski, chief investment strategist at BMO Capital Markets in New York. “The Fed did its job today.”“The Fed message to the markets is, take a breath,” said Brian Belski, chief investment strategist at BMO Capital Markets in New York. “The Fed did its job today.”
[Investors expect a much less aggressive Fed in 2019.] [Read more about the Fed’s decision and its outlook for the economy.]
Oil prices, which have taken a pounding in recent days, were relatively stable, though remaining near their lowest level this year. The market did not make a decisive move lower until Mr. Powell’s post-decision news conference. Close observers of the stock market noted that losses in the S&P 500 accelerated after Mr. Powell answered a reporter’s question about the whether Fed had discussed changing its efforts to shrink the large stockpile of safe government bonds it is holding on its balance sheet.
In the United States, package delivery giant FedEx was down as much as 10 percent after it cut its forecast for 2019 profits more sharply than analysts had expected. FedEx executives spotlighted ongoing strength in the United States, thanks to the strong position of consumers. But it downgraded its outlook for the global economy. “I think that the runoff of the balance sheet has been smooth and has served its purpose,” Mr. Powell said. “I don’t see us changing that.”
“The peak for global economic growth now appears to be behind us,” said a FedEx executive, Rajesh Subramaniam, on a conference call following the release of its results yesterday. In the years after the financial crisis, the Fed’s balance sheet ballooned as the central bank engaged in multiple rounds of so-called quantitative easing. The policy, in which the Fed effectively created new money and used it to purchase Treasury bonds in an effort to push longer-term interest rates lower, was also credited with helping to push a broad range of other asset prices — including stocks, corporate bonds and commodities — up sharply as well.
For most of the year, stocks in the United States, which has an economy that is less dependent on trade, had been largely insulated from worries about the global economy. Now, the Fed is shrinking its holdings of bonds on the balance sheet by around $50 billion a month, in a process that some call quantitative tightening. And those efforts have been getting more attention lately, since they were highlighted in a Wall Street Journal op-ed from a former Fed official, Kevin Warsh, and the financier Stanley Druckenmiller earlier this week. President Trump appeared to be referring to the balance sheet reduction when, in a Twitter message earlier this week, he urged the Fed to “Stop with the 50 B’s.”
But a sell-off that started in late September gathered pace in October, and has sent the S&P 500 stock index down more than 13 percent since from its recent high-water mark. In December alone, the S&P was down nearly 8 percent through Tuesday. Increasingly, some see the phenomenon as playing a role in the unusually broad headwinds financial markets have faced this year. For the first time in decades, almost every broad asset class has declined or posted minuscule gains this year. And after the sell-off on Wednesday, the S&P 500 is now down 6.2 percent for the year.
In light of those losses, investors have increasingly come to see Wednesday’s decision from the Fed as crucial to whether the current bull market has more room to run — the latest episode in a close relationship that developed between financial markets and the Federal Reserve in the aftermath of financial crisis and deep recession that began in 2008. “If interest rates are going to be normalized higher, that means stock prices need to be normalized lower,” said Matt Maley, equity strategist with institutional brokerage firm Miller Tabak in Boston. “That’s what’s been going on.”
That autumn, the United States suffered the economic equivalent of a heart attack: financial markets seized up, cutting off the flow of money to companies through the markets. As stocks plummeted and unemployment surged, the Federal Reserve sprang into action, cutting interest rates to near zero and starting a process that would eventually pump trillions of dollars into financial markets. Of course, this year’s losses have to be put in perspective. Since the market bottomed in March 2009, the S&P is up 270 percent.
The Fed’s actions were widely credited with cushioning the collapse of markets and supercharging the rally in stocks that began in March 2009. By some measures it is the longest bull market on record, having pulling the S&P 500 up by more than 275 percent. That rally is, by some measures, the longest bull market on record, though its survival is looking increasingly precarious. The drop of the stock market on Wednesday puts the S&P 500 down 14.5 percent from its recent peak — a drop of 20 percent would put stocks in a new bear market.
As the economy recovered, the Fed began to withdraw some of that support. The central bank began raising the short-term interest rates it controls in December 2015. And it has also effectively withdrawn hundreds of billions of dollars from financial markets this year, which has helped put upward pressure on longer-term interest rates, which are the foundation for key consumer borrowing rates.
“The plan for the Fed has been, as the economy heals and approaches something that looks more like a healthy state, they should gradually back away from their support of financial markets and kind of let them fend for themselves,” said Julia Coronado, a former Federal Reserve economist and president of the economic consulting firm MacroPolicy Perspectives. “They have to sort of stand on their own now.”“The plan for the Fed has been, as the economy heals and approaches something that looks more like a healthy state, they should gradually back away from their support of financial markets and kind of let them fend for themselves,” said Julia Coronado, a former Federal Reserve economist and president of the economic consulting firm MacroPolicy Perspectives. “They have to sort of stand on their own now.”