Published: Fri, December 21, 2018
Markets | By Otis Pena

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

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

This was the Fed's ninth hike in two years, with the central bank making the decision to increase interest rates despite a stock market selloff and stern warnings from US President Donald Trump.

The stock market turned sharply negative Wednesday, erasing earlier gains, after the central bank said it would hike interest rates to a target range of 2.25% and 2.5%, a move that was widely expected.

As JPMorgan notes in a report published last Friday, this year's peak-to-trough decline in the S&P 500 indicates a 30 per cent probability of a United States recession within the next three to six months, with some sectors in the index assigning a more than 50 per cent probability to a contraction in economic output within this period. Bond prices surged, though, sending yields lower. And the Fed rate hikes themselves are expected to curtail consumer and business borrowing.

Trump made these remarks as the stock market has dropped significantly over the past two months.

In its official statement, the Fed said increases to its benchmark rate would help the USA economy sustain its expansion, keep the unemployment rate low and inflation near 2%.

Greg McBride, chief financial analyst at Bankrate.com, a personal finance website, said: "The Fed downshifted their projections of 2019 economic growth, inflation, and interest rate hikes - not in a big way but enough to remove the urgency of repeated rate hikes".

The U.S. housing market's performance as of late is one key indicator that economists and the Fed have been watching closely as they chart a course for the next few years. The S&P 500 Index is down almost 13 percent since the start of October.

A screen displays the headlines that the U.S. Federal Reserve raised interest rates as a trader works at a post on the floor of the New York Stock Exchange on December 19, 2018.

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Powell will have a chance to hone the central bank's message to markets when he holds a press conference at 2:30 p.m.

Volatility gripped financial markets a day after the Federal Reserve sent shock waves across assets, with the rising threat of a government shutdown adding to a litany of concerns buffeting equities.

The Treasury secretary said investors were also overly anxious with the Fed's current program to trim its balance sheet from the $4.5 trillion record level it hit when it was buying Treasury securities and mortgage-backed bonds to lower long-term rates.

Seoul's Kospi retreated 0.3 percent to 2,052.01 and benchmarks in Taiwan, New Zealand and Southeast Asia also declined. For the last three years the Fed told investors weeks in advance that it was nearly certain to increase rates. There were no dissents in the Fed's policy decision. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent.

Separately, the District of Columbia sued Facebook for allowing Cambridge Analytica, a data-mining firm working for the Trump campaign, to improperly access data from as many as 87 million Facebook users. Futures on the Nasdaq 100 Index and Dow Jones Industrial Average dropped more than 1 percent. The Australian dollar edged higher.

Benchmark U.S. crude climbed 2.1 percent to $47.20 a barrel in NY.

The Nasdaq fell 1.6 percent to 6,528.41.

Oil prices meanwhile tumbled, with Brent striking $54.64 per barrel, the lowest level since September 2017. The euro rose to $1.1368 from $1.1357 and the British pound dipped to $1.2621 from $1.2639.

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