Published: Fri, December 21, 2018
Money | By Ethel Goodwin

Mnuchin Says Market Drop ‘Overblown,’ Cites Dovish Fed Signals

Mnuchin Says Market Drop ‘Overblown,’ Cites Dovish Fed Signals

Although it was widely expected that the Fed would announce and implement a 25-basis point rate hike yesterday, market participants and analysts had hoped for or were under the assumption that the Fed would soften its tone and aggressive stance in regards to normalizing interest rates.

The US Federal Reserve has raised interest rates and said it was keeping the core of its plan to tighten monetary policy intact even as central bank officials said they would likely slow the pace of further rate increases next year.

The Fed's rate hikes have come under increasing criticism from President Trump, who said in a tweet the Fed should "Feel the market, don't just go by meaningless numbers".

Today market participants witnessed a continuation of the tremendous selling pressure in USA equities, as well as a real and respectable surge in gold pricing.

The greatest influence on the dynamics of EUR/USD and the entire dependent market as a whole was provided by Powell's comments and forecasts for the next steps of monetary policy. "Inflation has remained low and stable, and is ending the year a bit more subdued than most had expected".

Ultra-low rates were used by central banks across the world during the crisis to try to aid economic recovery but policy makers in the U.S. are returning them to a more normal level as they focus on keeping a lid on inflationary pressures.

This is the fourth hike this year, . and the ninth since the Fed began normalizing rates in December of 2015.

The Dow and S&P 500 closed about 1.5 per cent lower, while the Nasdaq fell than 2 per cent.

Among other threats: the trade dispute between the US and China, and rising USA interest rates, which act as a brake on economic growth by making it more expensive for businesses and individuals to borrow money.

At the same time, the reduced bond yields can send a negative signal on the economy.

While he highlighted Powell's focus on solid growth prospects, Naroff said the markets may have wanted the Fed to keep rates on hold next year.

Fed funds futures are now pricing in only about a 50 percent chance of one rate hike. The central bank cut its expectations for growth in 2019 to 2.3% from 2.5% but left its unemployment forecast unchanged at 3.5%.

Mnuchin said the market overreacted, with computerized program trading taking over and driving stock prices down further.

On the issue of whether the current trade negotiations between the USA and China will be able to reach a deal to avoid more penalty tariffs, Mnuchin expressed cautious optimism. Major economies are weakening, and fears of a crisis are now hitting the market, as seen by the many sell-offs this week. Relative to their size, they also tend to carry more debt than larger companies, which could be a problem in a slower economy with higher interest rates.

But Fed policymakers foresaw two rate hikes in 2019 rather than three as projected in September.

The S&P-ASX 200 index bounced 0.8 per cent at the open before running into heavy selling that knocked it back through 5500 points and a 1.45 per cent loss at 5426 points amid broad global asset liquidations that are a sign of a year-end funding crunch.

"Given the stock market declines and negative worldwide economic news - recognised in the statement - this still points to quite a bit of confidence at the Fed in the ability of the USA economy to withstand a few more rate hikes", said Brian Coulton, chief economist at Fitch Ratings.

Meanwhile the oil price also fell sharply, with a barrel of Brent crude slipping more than 3% to below $55 a barrel to its lowest level in more than a year.

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