Stock Selloff Puts Heat on the Fed


Stocks ended the week in a free fall.

The Dow Jones Industrial Average lost 550 points Friday and 1,100 points on the week. The S&P 500, the Dow, and the Nasdaq Composite index all plunged by more than 4% in the market’s worst weekly performance since March. December’s start has been the worst since 2008. Uh-oh.

At Friday’s close, the S&P had slipped into correction territory—a decline of 10% from its high—for the second time this year, a rare event. The Nasdaq was also in the correction zone, 14% off from its August all-time high, while the Dow wasn’t quite there.

The only good news: oil prices firmed on a new deal to cut production between Russia and the Organization of Petroleum Exporting Countries (OPEC), and the ten-year U.S. Treasury note’s yield fell to 2.85%.

Oh, yes, and stocks haven’t re-tested their February-April lows. Yet.

That’s little comfort to Federal Reserve Chairman Jerome “Jay” Powell, whose pathway towards “gradually” higher interest rates suddenly has become more treacherous.

As I wrote in my MarketWatch column this past week, no Fed chairs will admit they pay attention to the stock market when making decisions on interest rates, but they all do.

Stock and bond markets are good barometers of how investors—and thus, consumers and businesses—view the economy. When markets sell off, consumers and businesses buy fewer goods and services, and take less risk. That can make a downturn a self-fulfilling prophecy, and can cause Fed officials to back off.

That’s what some folks thought Powell did last week, when in a speech to the Economic Club of New York, he softened his rhetoric on rates a bit, and stocks soared. But the nothing burger of a “deal” on trade between President Trump and President Xi Jinping of China to talk for 90 days, followed by a haranguing Trump tweet in which the president called himself “Tariff Man,” caused the selling to start again.

So, Powell is now in the hot seat. Friday’s jobs report was OK and wage inflation is still pretty moderate. But traders expect Powell to bump up the federal funds rate by another ¼ point at the Federal Open Market Committee meeting next week.

Fed governor Lael Brainard and New York Fed president John Williams, both FOMC voters,  said they thought rates should still rise. With the ¼ point hike likely, traders and investors will be weighing every word and syllable Powell utters at his post-meeting news conference.

No pressure, Jay. But as Harry Truman once said, if you can’t stand the heat, stay out of the kitchen. This is  where Powell will earn his $200,000 annual salary.