Published: Fri, December 21, 2018
Finance | By Jaime Brady

USA stocks' post-Fed swoon continues as oil slumps

USA stocks' post-Fed swoon continues as oil slumps

The reasons for pessimism are well known: the withdrawal of monetary stimulus led by the Federal Reserve; the simmering US-China trade war; and signs of a regime change in markets as a long period of calm gives way to a surge in volatility.

The rate hike came a day after Mr Trump urged the Fed not to "make yet another mistake", while on Monday he said it was "incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us. the Fed is even considering yet another rate hike".

Prior increases have helped drive up the Fed's benchmark rate over 2 per cent - which in turn drives up borrowing costs for ordinary Americans.

After the Fed's announcement, Powell said Trump's tweets and statements would have no bearing on the central bank's policymaking.

In a unanimous decision, the Fed delivered on what some economists called a "dovish hike", raising the target range for the federal funds rate by 0.25 point, with 2.5 percent at the high end, while providing the clearest signal to date of a cautious stance moving forward, especially as it keeps an eye on potential worldwide risks. The pound trimmed a gain after Britain's central bank said it now sees inflation slowing to below the 2 per cent target as soon as January. Some analysts had hoped that recent stock-market turbulence might convince the Fed to halt the program, which, like rate hikes, acts to tighten credit. "We look at a really big range of financial conditions", Powell said, pointing to "strong" economic forecast for next year.

The rate increase, the fourth of the year, was expected, but Powell's comments on the balance sheet in a news conference, though a repetition of longstanding Fed policy, prompted a sell-off on equity markets.

Benchmark 10-year Treasury yields fell as low as 2.75 per cent, the lowest since April 4. However, if the Federal Reserve seems as if it is still on track to continue raising rates three times in 2019, that will send the USA dollar much higher as traders are starting to try to get ahead of the announcement.

The S&P's 1.54% decline on Wednesday was the 19th time the index fell more than 1% on a Fed decision day, and the most negative reaction to a Fed decision since September 21, 2011, when the index fell 2.94%, according to Bespoke.

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"Maybe they have already committed their policy error", said Fritz Folts, chief investment strategist at 3Edge Asset Management.

Early gains for supermarket stocks haven't stopped the Australian sharemarket dipping to a fresh two-year low, with the bourse mirroring a Wall Street tumble following the US Federal Reserve rate hike. The fear is that optimism could translate into more rate hikes in the future.

Trump has sought to induce the Fed to keep interest rates low during his presidency.

That was less than the three it had previously pencilled in, with the Fed acknowledging some of the threats facing the global economy and slightly scaling back its outlook for US GDP growth in 2019. Oil prices are down more than 30% from peaks seen in October.

The S&P 500 fell 36 points, or 1.4 per cent, to 2,471.

In the Fed's policy statement, it pointed out the strong U.S. jobs market and consumer spending and said it sees risks as "roughly balanced", adding that it would continue to monitor global economic activity.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1.1 percent, with Australian shares also declining 1.3 percent to a two-year closing low.

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