Dow sinks another 464 points as slowdown fears worsen

US Fed raises interest rates, signals more hikes ahead

The Dow slid to its lowest level of 2018 after the US Federal Reserve, as expected, raised rates for the fourth time this year. 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. Stocks didn't take the news well. And that the belief that the central bank will always support financial markets in turmoil is wrong?

Inflation: Median headline inflation forecasts for Personal Consumption Expenditures (PCE) were lowered to 1.9% in 2018 and 2019 from 2.1% and 2%, respectively, and core PCE inflation forecasts were lowered by 0.1pp to 1.9% in 2018 and by 0.1pp to 2% between 2019 and 2021, suggesting slightly less confidence in the inflation outlook. The report said Facebook had arrangements with more than 150 companies including Microsoft, Amazon, Spotify and Netflix that some companies read, write and delete users' private messages or see the names of a user's friends or their news feeds without their consent. "He knows if you don't ask for much, you aren't going to get much".

Veneta Dimitrova, senior US economist for Ned Davis Research, estimates that a 10 percent decline in inflation-adjusted household financial wealth in one period subtracts about 0.5 percent from real consumption growth in the subsequent period.

"Political comments have played no role whatsoever in our decisions or discussions on monetary policy", Powell said on Wednesday, noting the Fed is an independent agency.

In particular, his speech that day noted that, even if the longstanding connection between very low unemployment and high inflation seems to have been broken, it would be risky for a central banker to ignore the risk that it could reemerge, and force a recession-inducing run-up in interest rates. The S&P 500 is down more than 10 per cent in December, on track for its worst month of the record bull run.

Beyond the Fed, trade and politics remain dominant themes. It wasn't as supportive as some had hoped.

During a news conference after the release of the policy statement, Fed chairman Jerome Powell said the central bank would continue trimming its balance sheet by $50 billion each month, and left open the possibility that continued strong data could force it to raise rates to the point where they start to brake the economy's momentum.

In a recent research paper, two colleagues and I explored the interplay between central bank monetary policy and stock prices.

The dispute with China, even with a ceasefire declared until March 1 for negotiations, has created fears of slowing U.S. and global growth, and caused stock markets to retreat, with Wall Street wiping out all of the 2018 gains. A mathematical process for calculating how much one set of data influences another shows that almost half the percent changes in the sentiment gauge are explained by swings in stock prices over an annual basis. "And what we saw basically was a little asset reallocation from the stock to the bond market". But it does so primarily when markets drop a lot.

The deeper worry for Trump is whether stock market jitters will spill over into the broader economy.

The hike put further pressure on the white metal in a year that saw it drop nearly 14 percent. A bull market, on the other hand, is when stocks jump at least 20 percent from their previous lows.

"There's significant uncertainty about the - both the path and the ultimate destination of any further rate increases", Powell said, adding that low inflation "gives the committee the ability to be patient in moving forward".

A rise in short-term interest rates and a fall in the long-dated yield rekindled worries of an inversion in the yield curve, where shorter-debt yields become higher than longer-term ones.

Advancing issues outnumbered decliners for a 2.16-to-1 ratio on the NYSE and a 1.66-to-1 ratio on the Nasdaq. "We look at a really big range of financial conditions", Powell said, pointing to "strong" economic forecast for next year. The S&P 500, the benchmark for many index funds, has fallen 17.5 percent from its high in September.

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