The latest Federal Reserve credit tightening leaves Jerome Powell exposed in multiple ways. The U.S. central bank raised rates on Wednesday despite criticism from President Donald Trump. Slowing growth and bearish markets will only complicate its task going forward.
Trump has been hammering his hand-picked chairman for months to hold back on rate hikes, telling him on Tuesday to “feel the market.” On Wednesday, the Fed hiked rates by a quarter point to a range of between 2.25 percent and 2.5 percent. It’s the ninth such increase since it began raising rates in 2015.
The Fed’s path in 2019 is trickier. There are more signs growth is slowing as a global tit-for-tat tariff war takes its toll. On Tuesday, FedEx said it was cutting its 2019 earnings guidance, offering buyouts and reducing international capacity because of more sluggish global trade. In October, the IMF lowered its global economic outlook. In recent weeks major U.S. stock-market indexes have fallen sharply because of those factors.
The Fed gave a nod to the headwinds. Powell told reporters on Wednesday there is a “mood of angst” about growth and with increasing debate on where rates should be, the Fed would make future decisions based on a “diverse array of opinions.” The projection of board members and regional bank presidents pointed to two rate hikes in 2019, down from three as recently as September. That’s still an aggressive posture, considering that CME futures now forecast no hikes in 2019, down from two a month ago.
Those gestures failed to dampen investor nerves. The S&P 500 Index fell nearly 3 percent in the first hour after the news before rebounding somewhat, while yields on U.S. Treasuries tumbled.
Making things even more challenging, the chairman will hold media briefings after every rate-setting meeting next year. But more talk can increase the risk of miscommunication as shifting economic winds make it harder to offer guidance. In October, Powell said the Fed was a “long way” from a neutral rate that neither harms nor helps the economy, which spooked markets. In November, he tried to allay concerns by saying interest rates were “just below” neutral, sparking a short-lived rally. On Wednesday, he said rates were at the “bottom range” of neutral.
It could be a bumpy ride for Powell and the markets in 2019.
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