Wall Street falters as Federal Reserve points to more rate hikes ahead

Cornelia Mascio
Febbraio 25, 2018

FOX Business' Gerri Willis, Bullseye Brief Publisher Adam Johnson and Janney Montgomery Scott's Mark Luschini discuss the Federal Reserve's skepticism over rising wages.

That in turn has stoked anxiety that many central banks will start to tighten policy and raise borrowing costs, hurting corporate earnings and clouding the outlook for what had been expected to be another solid year of global economic gowth.

Higher inflation has become a focal point on Wall Street amid investor concerns that wages are heating up faster than Fed policymakers anticipated.

The Fed is widely expected to raise interest rates four times during the rest of the year. Investors viewed that statement as a sign that Fed officials are considering more rate increases than planned.

But the Fed acknowledges that problems could appear down the line.

Quarles said Thursday that "further gradual increases in the policy rate will be appropriate to both sustain a healthy labor market and stabilize inflation around our 2 percent objective".

The spin from traders concerning the Fed minutes evolved rapidly during the day, as folks realized that the initial dovish take was misguided for a few reasons.

Amazon rose 1.9 percent, while tech heavyweights such as Facebook, Apple and Alphabet gained between 1 percent and 2.6 percent.

"Right now Fed fund futures are pricing in three rate hikes with just under a 50-50 short of a fourth", said Matt Miskin, market strategist at John Hancock Investments. In its semiannual monetary policy report to Congress, the Fed signaled that it saw broad improvement in the US economy, and while it pointed to a pickup in inflation toward the end of past year, it didn't suggest that a rise in prices warranted more aggressive policy action.

An account of the Fed's most recent policymaking meeting, in January, reported that some officials had shared that optimism, expressing the view that the Fed might be able to increase its benchmark rate somewhat closer to its precrisis level. Yet five years of below-target inflation, combined with an aging population and slowdown in labor force growth, has sparked a debate over ditching a longstanding 2-per cent price target. But long-suffering savers have been praying for higher rates for almost a decade.

A continued drop by treasury yields may generate early buying interest on Wall Street, with the ten-year yield pulling back further off the four-year closing high set on Wednesday. Yields rise as bond prices fall.

I expect the market to move lower here to test its recent lows and pressure new Fed chairman Jerome Powell - which will make his first appearance before Congress in his current role on February 28 - to walk back what looks like increasing hawkishness from the central bank.

The Fed is aiming to bring interest rates, now set at a 1.25 percent to 1.5 percent range, back up to the historic neutral level.

U.S. Treasury yields fell as uncertainty about the recent stock market volatility helped boost bond demand and investors rebalanced portfolios near the month end.

"The market is trying to figure out what Fed policy is going to be going forward", Essaye said. Mr. Powell could be very different from Ms. Yellen, she said.

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