Published: Thu, March 21, 2019
Markets | By Otis Pena

Dow drops more than 100 points amid Fed announcement

Dow drops more than 100 points amid Fed announcement

The change could prompt speculation that December's rate hike, despite a Wall Street sell-off and signs of weakening economic activity, was aimed at demonstrating the central bank's independence from Mr Trump.

But with unemployment falling and wages finally moving higher, inflation might rear its head as soon as the summer, compelling the Fed to act, economists caution.

Mr Powell is not alone in becoming more cautious.

The European Central Bank (ECB) has signaled it will continue to be dovish when it comes to "normalization" of interest rates as the Eurozone has yet to post numbers that would warrant rate increases or winding down balance sheet positions. Inventory, meanwhile, seems to keep rising.

China, too, has been easing policy in the face of some domestic weaknes and the broader global slowdown.

Nobody expected that and we didn't get one.

US officials now control the fed funds rate by paying banks interest on the $1.7 trillion in reserves they hold at the Fed and through other money-market transactions.

Having closed down the Fed's double-barrelled tightening strategy of 2018, which culminated in December with the ninth hike in three years, Mr Powell said he would remain "patient" about the likely path of policy. US Government Bonds also have the highest income yields in the G7 by a significant margin, potentially making their expected total returns (bond income plus or minus capital gains) look healthy this year within the defensive asset complex.

I noted yesterday that the weakness in the United States consumer sector had registered in forward-looking equity prices as well as backward-looking data on spending.

The Fed's decision not to raise rates this year was a marked change from three months ago, when the central bank projected two rate hikes in 2019. Humana dropped 4 per cent, United Rentals fell 3.8 per cent and Oracle shed 2.6 per cent.

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Walker notes. "This will involve asking users of existing and new Android devices in Europe which browser and search apps they would like to use".

In a major shift in its perspective, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

Fed funds futures contracts began pricing in a better-than-even chance of a rate cut by next year after the release of the policy statement and projections.

The median rate projection of Fed officials compared with two hikes in the December forecasts, which spooked investors at the time.

They also said that as of May they would slow their monthly reduction of as much as $50 billion in asset holdings, and halt them altogether in September, ending what amounted to a second lever of monetary tightening that had run in the background since late 2017.

It said it would end its balance sheet runoff in September, provided the economy and money market conditions evolved as expected.

Beginning in October, the Fed will roll its maturing holdings of mortgage-backed securities into Treasuries, using a cap of $20 billion per month.

The Fed's policy statement was unanimous. On the other hand, the Fed canceled any 2019 rate hikes precisely because of concerns about the economy and prospects for growth.

"That was a pretty radical statement and I'm not sure that was a wise thing to do", said Mr Fisher.

Having downgraded their USA growth, unemployment and inflation forecasts, policymakers said the Fed's benchmark overnight interest rate, or fed funds rate, was likely to remain at the current level of between 2.25 percent and 2.50 percent at least through this year, a wholesale shift of their outlook.

"We always emphasize that the interest rate projections in the [summary of economic projections] are not a committee decision", Powell said.

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