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Market’s negative reaction to Fed rate hike was ‘overblown,’ Mnuchin says

21 December, 2018, 19:18 | Author: Shawna Walton
  • The US Federal Reserve

In Japan, 10-year bond yields fell to within three basis points of zero per cent. Bank of Japan Governor Haruhiko Kuroda said in a press conference Thursday that there was no problem if yields fell into negative territory, suggesting he has no plan to intensify the central bank's tapering of asset purchases.

Wednesday's decision marked the Fed's fourth rate hike this year and the ninth such move since late 2015, as the central bank moves forward on the path of monetary policy normalization. After adding in an additional thousand points from the highs achieved in October and dividing that number into the 20,000-point gain, which is the result of the massive 10-year rally from 2009 to present day, traders could experience the most significant decline in history.

To be sure, markets have had stronger responses to Fed decisions in the days following a rate increase.

The two-year US yield stood at 2.656 percent, just 0.097 percent less than the 10-year yield.

"I think that with the advent of computerized trading which has such a big part of the market now combined with the Volcker Rule where you can't have market makers commit capital, you just have much bigger moves in both directions", he said. Despite an outlook that is "roughly balanced, " officials pointed at potential threats from a softening world economy.

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

Walking a fine line between being overly optimistic and too pessimistic, the Federal Reserve bumped up its benchmark interest rate on Wednesday and said the USA economy remained strong, but it warned of possible headwinds next year and signaled it would tighten credit twice in 2019 rather than three times as it previously forecast. The S&P 500 skidded 39.20 points, or 1.5 percent, to 2,506.96.

"I am not anxious [about Trump] because I know we are always going to do our jobs as we have always done them". "And nothing will cause us to deviate from that". Overall, I think that the markets will continue to favor gold overall, because not only do we have the idea of the Federal Reserve stepping away, we also have the possibility of gold being used as a safe haven.

The US central bank has also been in the crosshairs of President Donald Trump who has accused the Fed of undermining his efforts to grow the economy. The president has complained that the moves are threatening the economy.

Wall Street investors reacted negatively to the interest rates hike and Fed's less dovish forward-looking statement. The quarter-point hike took the rate to the target range of 2.25-2.5 percent. Unemployment in November remained at 3.7 percent, its lowest since 1969.

Fed officials expect the key rate to rise to 2.9% at the end of 2019, and 3.1% at the end of 2020, down from 3.1% and 3.4%, respectively, in their September projection.

Diane Swonk, chief economist at Grant Thornton, said the Fed projected that it is prepared to be flexible in deciding on future hikes but the market had wanted even more assurances that the central bank is ready to hit the pause button. Yields turned negative as treasuries popped, while the yield on the 30-year U.S. Treasury dropped below 3% - the first time in almost three months.

Mr Powell's task is also complicated by the repeated attacks from Mr Trump.

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