What Did the Fed Say to Push the Dollar Down?

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Treasury Secretary Steven Mnuchin offered a defense of the Federal Reserve's interest-rate outlook, suggesting investors have put too much weight on the likelihood of further hikes and pointing to Fed signals that the tightening may be almost finished.

However, the vast majority of today's selling pressure in USA equities was related to yesterday's announcement by the Federal Reserve in which they raised interest rates for the fourth time this year.

Interest rates have increased seven times since President Donald Trump took office.

"Powell dropped some subtle hints he thinks the neutral rate is higher than the lower bound estimate of 2.5%".

At a press conference on Wednesday, Powell defended the Fed's independence, saying that political pressure played "no role whatsoever" in its discussions or decisions. First is that in India when we say CPI inflation is 2.3 percent which is a reason for rates to be lowered, we may be jumping the gun because the core inflation number is sticky in the 5-6 percent range.

But a bounce in oil prices and Hong Kong stocks help staunch the selling and after two more wild swings it closed down 38.2 points, or 0.69 per cent, at 5467.6 on volume 25 per cent above average, as three of the four big banks hit multi-year lows. And we also have a positive forecast, as I mentioned.

The renewed increase - the ninth since the Fed started raising rates back in 2015 - mirrored the consensus view among investors and once more demonstrated the central bank was not willing to bow to any outside pressures.

As JPMorgan notes in a report published last Friday, this year's peak-to-trough decline in the S&P 500 indicates a 30 per cent probability of a United States recession within the next three to six months, with some sectors in the index assigning a more than 50 per cent probability to a contraction in economic output within this period.

"We expect additional rate hikes will invert the three-months to 10-year yield curve, which is a reliable signal for a bear market for stocks and a coming recession for both the USA and the rest of the world", said Jeffrey Kleintop, chief investment strategist at Charles Schwab in Boston.

The move which comes amid President Trump’s repeated criticism of Fed rate hikes is expected to set off a domino effect across the US economy
The move which comes amid President Trump’s repeated criticism of Fed rate hikes is expected to set off a domino effect across the US economy

As investors flocked to the safety of government bonds, U.S. benchmark Treasury yields fell to more than eight-month lows on Wednesday.

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. And interestingly even though it is convinced the inflation numbers are within the 2 percent range it has still taken the decision to increase its interest rate.

- New dot plot suggests that two hikes could come in 2019, down from three; however, rates markets had been pricing in just one ahead of time.

Australian shares are likely to plummet after the US Federal Reserve announced another rate hike this week.

The dollar initially gained as the Fed was seen as more hawkish but it lost steam against other safe-haven currencies, such as the yen. It also sent the stock market dropping in the immediate minutes after the announcement.

The benchmark S&P 500 index tumbled to a 15-month low, extending a streak of volatility that has dogged the market since late September.

The Fed trimmed its forecast for 2019 economic growth to 2.3 percent after an expected 3 percent GDP gain this year.

The Federal Open Market Committee "will continue to monitor global economic and financial developments and assess their implications for the economic outlook", the statement said.

The Federal Reserve lowered its forecast for future rate hikes.

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