Starting a new job is always stressful, but new Fed Chairman Jerome Powell had a particularly harrowing first day when the Dow saw the single largest sell-off in the history of the index.
Talk about inauspicious beginnings! The S&P 500 and the Nasdaq were hit by big losses as well.
Market watchers think that the sell-off is just a transitory bump and will probably be healthy for the overheated market in any case. But uncertainty has a way of spooking investors and expectations regarding Fed activity are mixed. The new head plans to continue normalizing monetary policy, but former Chair Alan Greenspan fears that Powell could be looking at bubbles in both the stock and bond markets. He also notes that the bond bubble could be more consequential, particularly as the new tax law will add to the government’s debt burden.
At least Powell is inheriting a healthy economy, with GDP growth exceeding 3% in two consecutive quarters in 2017. The Atlanta Fed projects the economy will expand by 4% in the first quarter of this year. The economy is nearing full employment, and the unemployment rate is around 4.1%. Wages are also rising, with average hourly earnings rising in January at the fastest rate since 2009. While this bodes well for consumers, analysts are wary as the rise could see inflation pick up before effects from the Tax act are observed.
One analyst, Larry McDonald, found of The Bear Traps Report, notes that the administration is using countercyclical fiscal policy at the end of the economic cycle. If inflation spikes, the Fed will have to raise rates more quickly than they might otherwise, thus curtailing the economic recovery.
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Turmoil Roils Market as Fed Inexperience Looms Over Interest Rates | US News