Fed meeting - What you need to know in markets on Wednesday

Fredrick Soto
September 30, 2018

Lewis Carroll, meet Jerome Powell.

Fed Chairman Jerome Powell said the removal of the wording, which had been a staple of the central bank's guidance for financial markets and households for much of the past decade, did not signal a policy outlook change. "We can do other things with the money", he said.

But Powell tells reporters at a Wednesday news conference that the import taxes on steel, aluminum and goods from China could be bad for the economy if they stay in place a long time.

Jim O'Sullivan of High-Frequency Economics said his team continued to expect 4 hikes next year. There wouldn't be any further inference to be drawn about future policy that way.

For its part, the Fed acknowledged that it is hearing a "rising chorus of concerns" over President Trump's policy of imposing tariffs on certain imports.

The location of a neutral rate for policy is the subject of heated debate, with estimates within the committee ranging from 2.5 per cent to 3.5 per cent. Powell has repeatedly played down the importance of neutral given economists' inability to know precisely where it lies. The Fed had used variations of that pledge in the seven years that it kept its key rate at a record low near zero and over the past almost three years in which it's gradually tightened credit.

Still, even with eight hikes in the past three years, interest rates remain historically low. So essentially, yesterday's Fed activity became a sell the rumor, buy the fact situation. Equities surrendered earlier gains, with the S&P 500 ending down 0.33%.

Investors should look at the yield on their fixed income investments, which might be around 3 percent and compare it to a 12-month CD for 2.5 percent.

Stock funds should also feel an effect, and emerging-market funds have been among the biggest losers recently.

"Pension funds are rebalancing out of stocks and into bonds on a month-end and quarter-end trade", he writes in an email.

But Fed Chairman Jerome Powell said the central bank was hearing a "rising chorus" of concerns from businesses around the country about uncertainty and rising costs, but that the myriad trade conflicts had yet to significantly weigh on United States economic data.

Ever since the Fed began its streak of rate hikes in late 2015, credit cards are the consumer product that have been impacted the most, Barrington said.

In a highly unusual move for a president, Trump has publicly complained that the Fed's rate increases could blunt his efforts to boost growth through tax cuts and deregulation. Finance Minsiter Kim Dong-yeon and Bank of Korea governor Lee Ju-yeol said Thursday that the Fed's rate hike will likely have a limited impact on Korea's capital markets, saying the pace of rate normalization is in line with expectations. It will impact, not just rates and the availability of credit in the USA, but the supply of U.S. dollars globally.

But Powell stressed that that was not an indication of a change "in the path of policy".

It's a busy time financially - people in this age group may be focused on paying down debts such as auto loans, mortgages and student loans while also trying to stoke their savings. Powell will nearly certainly be asked about trade.

That's been the conundrum faced by every Fed.

That will add to the upward pressure on market interest rates but, over the course of 2019, will also see US$600b of liquidity siphoned out of the system. The European Central Bank said it will maintain its policy rate of minus 0.4 per cent at least through next summer, while the Bank of Japan is set to stick with its current settings until 2020.

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