Last week, the Federal Reserve didn’t pull any rabbit punches on the capital markets by raising interest rates another 25 basis points to a range of 2.25 to 2.50. In order to mitigate the risk of a recession, Minneapolis Fed President Neel Kashkari said the central bank needs to exercise patience with further rate hikes.
“My view is we should be patient. We should pause the rate increases, let the economy continue to strengthen,” said Kashkari. “And if inflation picks up, we can always raise rates then.”
The stock markets’ latest declines didn’t veer the Fed off their rate-hiking path. The Dow Jones Industrial Average and S&P 500 are down 9.37 percent and 11.57 percent, respectively, in the last three months.
Meanwhile, the tech-heavy Nasdaq Composite has lost close to 14 percent within the last three months of what’s been a volatile market for U.S. equities. Nonetheless, backed by a solid economic growth and a strong labor market, the Fed forged on with hiking rates.
The markets have certainly taken a turn for the worst since September’s rate hike, and the Fed Chair did indeed recognize the change. Rather than completely ignore the latest market oscillations, Powell took these factors into account at the post-rate-hike presser, saying that “cross currents have emerged” and “financial market volatility” has increased.
Asked about the housing market and its doldrums with respect to rising rates, Kashkari said the economy still has forward momentum despite the real estate slowdown.
“Well, I think that’s right. There are some signs of slowing — housing and autos which are very sensitive to interest rates,” said Kashkari. “When interest rates go up, mortgage payments go up and so that slows the economy down, so we are paying attention to that. But I think overall, the balance is, well, the economy still seems like it has a lot of momentum. And my colleagues and I want to get back to a neutral monetary policy stance. So, look, there’s no crystal ball. We’re not exactly sure. But we’re trying to move cautiously as we’ve taken the data.”
Global Growth Concerns
Powell acknowledged the global growth concerns that have been reverberating through the capital markets. With the trade war between the United States and China ongoing despite the latest tariff ceasefire, global economies are beginning to show signs of retreating.
“Growth in the economies have moderated around the world,” said Powell, as Europe and China recently released weaker economic data.
Despite the dovish tones, Powell did manage to sing the praises of the current economy. Backed by data showing solid growth and a robust labor market, Powell mentioned that the “U.S. economy has continued to perform well” and “signs of a more robust economy proved accurate.”
However, Powell is quick to point that “there’s a mood of concern going forward” from businesses that the Fed has been speaking with regarding the current state of the economy. In fact, a Duke University/CFO Global Business Outlook survey revealed that almost half of U.S chief financial officers foresee a recession by the end of next year, while over 80 percent see one by 2020.
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