Rupee, bonds weaken post US Fed 'less dovish' comments

It has been a slow slog - the Fed has managed just nine increases in three years, and it may squeeze in just a couple more. That is also below the Fed's long-term goal of 2%. The unemployment rate is 3.7 per cent, a 49-year low. Those estimates are far below the Trump administration's insistence that its tax cuts would help accelerate annual growth to 3 percent in coming years. But the historic run of job growth has gone on longer than even the Fed expected.

Much of what drives people and businesses to invest in things such as real estate or stocks is access to low-interest rate loans.

BALANCE SHEET - At its peak, the Fed's stash of bonds totalled an eye-popping $4.25 trillion and served as a key plank of its crisis response.

The question for the Federal Reserve chairman is whether humility plays well with the financial markets. "If it had been more hawkish, investors would have anxious. the Fed would kill off yet another recovery". It is not a solicitation to make any exchange in commodities, securities or other financial instruments. The FOMC formulates monetary policy by setting a target range for the Federal Funds Rate (which is the benchmark interest rate in the US) and achieving it by conducting OMOs. Trump explained that he is disappointed in not being accommodated by the central bank, telling the newspaper that "they're making a mistake because I have a gut, and my gut tells me more sometimes than anybody else's brain can ever tell me". Right now, the USA economy is still showing many signs of strength with low unemployment, rapid hiring, robust consumer spending and high business and consumer confidence.

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.

The consensus of the committee was that the fed funds rate would have to rise twice next year, which is down from a forecast of three expected increases previously.

Inflation is expected to be at 1.9 percent next year, down from 2.0 percent projected in September, before picking up to 2.1 percent in 2020. As a result, central banks that were once the only game in town, celebrated for their dominant "whatever-it-takes" policy mindset that reduced the risk of a multi-year depression, now operate in much more of a "lose-lose" environment, and for reasons that are mostly outside their control. But exactly where that point is depends on what the latest economic data may show. The Russell 2000 index of smaller companies dropped 23.23 points, or 1.7 percent, to 1,326.

All three indexes are in the red for the year, with the S&P 500 down the most with a 6.23 percent loss.

Foggy, to say the least. Even so, the Fed is still plotting a more aggressive rate hike path than many in the markets expect. Its oversight since has been intense, with criticism pulling it in all directions depending on which end of Pennsylvania Avenue was speaking the loudest.

Treasury Secretary Steven Mnuchin said Thursday that the negative market reaction following the Federal Reserve's rate hike this week was "completely overblown". It's down 39 percent since late July on concerns about a slowdown in user growth, multiple privacy and safety scandals, as well as the possibility of increased regulation in the future. Also, don't let the market become any more illiquid than it already is.

Trump's complaints about the Fed haven't been limited to Twitter.

"We're probably entering a stage now where markets have got it (in) their head that we're preparing for quite sustained downside going into 2019". Still, policymakers seem less concerned than markets about the spillbacks to domestic consumption and investment from weakness in the rest of the world and technically vulnerable asset prices. Contributing to this view was a speech Powell gave last month in which he suggested that rates appear to be just below the level the Fed calls "neutral", where they're thought to neither stimulate growth nor impede it. Powell's comment suggested that the Fed might be poised to slow or halt its rate hikes to avoid weakening the economy.

  • Zachary Reyes