Febrero 19, 2018

Dow drops more than 1100 points

09 Febrero 2018, 01:12 | Dolorita Barahona

Jerome Powell's first day at Fed brings stock rout in rest of economy

Jerome Powell takes the oath during a swearing-in ceremony

What I mean is that for the ordinary citizen, the Fed has reduced itself to being an afterthought as to what affects the lives of normal people. Based on the statements by new Fed Chairman Jerome Powell, US interest rates are going higher.

There's no doubt that the 7.8 percent drop since January 26 is substantial; it represents almost $2 trillion of paper wealth. However, it indicated that it expects inflation pressures to heat up as the year moves on.

On Tuesday, the yield on the 10-year Treasury slipped to 2.73 percent from 2.84 percent. There was fear that wage inflation would trigger rapid rate hikes by the Federal Reserve. But Ed Yardeni, head of Yardeni Research, notes that this bull market has had 60 "panic attacks", where there's a dip that gets everyone buzzing, even though it doesn't turn out to be a full correction. Per CNBC, the S&P 500 also closed down 7%, its biggest decline since 2011.

A Fed interest-rate increase would not matter much-assuming the Bangko Sentral ng Pilipinas (BSP) also raises interest rates-to the local stock market.

One worry is the psychological impact a protracted market slide could have on consumer confidence.

In addition, the Fed expanded its bond portfolio, from just shy of $800 billion at the end of 2007 to more than $4.5 trillion. Oil prices have increased from about $46 a barrel in June to $65 on Wednesday.

Megan Greene, chief economist at Manulife Asset Management, said it isn't surprising that investors have suddenly grown nervous. Economic growth is solid.

In the US, unemployment is at a 17-year low. A mild rise in inflation is not only expected but healthy.

But regardless of which it becomes, it's good for everyone's mental health to look beyond the day's headlines and focus instead on percentage changes instead of point changes - and on historical patterns and the "why" behind the day's drop in the markets.

The heart of the stock market sell-off is about inflation. Construction workers and other hourly employees likely stayed home during January's icy spells and lost pay.

Days like Monday are never fun, but it should take much more to make investors question the merits of a well-constructed, long-term investment strategy. Politicians, including Trump, campaigned on giving US workers raises. Evidence of higher wages was "whacking" global markets last week, while higher bond yields threatened to "topple" a multiyear rally.

In practical terms, raising rates more quickly has challenges. It also plays a vital role in ensuring stability of financial system and integrity of payment system.

"How this "Grand Fiscal Experiment" affects wage and price inflation is something Fed has to be anxious about". He joined the Fed's board in 2012 after being nominated to the post by then president Barack Obama. Government bond yields, though, are now at multiyear highs, and the stock market is coming off a rough week that saw the Dow industrials lose 666 points Friday.

During the 2016 presidential campaign, Trump alleged that Yellen kept interest rates low for political reasons to benefit Obama.

United States 10-year Treasury yields fell away from 4-year highs at around 2.84 percent.

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