"We expect additional rate hikes will invert the three-months to 10-year yield curve which is a reliable signal for a bear market for stocks and a coming recession for both the USA and the rest of the world", said Jeffrey Kleintop, Chief Investment Strategist at Charles Schwab in Boston.
But now, a day after fresh Fed forecasts showed most policymakers see two rate hikes next year and one in 2020, the betting in rate futures markets is that they will need to backtrack. The central bank also emphasized that future rate increases will depend on the strength of the USA economy.
In other words, Wall Street will likely have to endure more pain before the Fed steps in to ease it.
USA stocks had been up sharply before the Fed's announcement, but the Dow Jones Industrial Average closed down about 352 points.
The Dow lost 464 points, or 2 per cent, to 22,859. "And markets have to react, live, to that "on the one hand, on the other hand" that Powell has to play in this economy". "And in that context, we think this move was appropriate for what is a very healthy economy".
The Fed has continued to forecast strong growth, which would support their case for tightening monetary policy, but the expected inflation spurt and rise in wages have not materialised.
-The U.S. dollar ticked higher after two days of sharp losses brought on by fears about the economy and slower increases in interest rates. The so-called federal funds rate now stands at a range between 2.25 percent and 2.5 percent.
The Treasury secretary said investors were also overly anxious with the Fed's current program to trim its balance sheet from the $4.5 trillion record level it hit when it was buying Treasury securities and mortgage-backed bonds to lower long-term rates.
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The strong United States dollar also has made American goods more expensive. And he later added that he expected further acceleration in workers' earnings. However, Powell characterized the shift as moving toward only "modestly" lower growth projections than previous estimates. And huge high-tech companies, once the best-performing stocks on the market, are now leading the way lower.
Trump made these remarks as the stock market has dropped significantly over the past two months.
Gregory Daco of Oxford Economics said the data added to "evidence that business investment momentum continues to gradually cool". It was coupled with a reduction in predicted 2019 interest rate raises to just twice.
For Powell, the economic outlook has become hazier as, in his words, "cross-currents" have emerged. Their fears seem to be coming from several fronts: the USA trade conflict with China; slowing global growth, particularly in China; and uncertainties about Britain's deal to exit from the European Union.
There are also fears that the brisk pace of USA growth this year reflected something of a sugar high, with the economy artificially pumped up by tax cuts and a boost in government spending.
"The Federal Reserve hiked rates as expected at December's meeting while delivering a more hawkish message than Wall Street was hoping for", Tim Duy, a veteran Fed watcher and economics professor at the University of OR, wrote in a blog post on Thursday.
Trump has been relentless in making his feelings on the issue public. While this wouldn't mean a interest rate cut is coming anytime soon, it may force the Fed to rethink its plans to continue raising rates. And this week, he renewed his harangues, tweeting Tuesday that the Fed should not make "yet another mistake". At the same time, analysts note that it would still be hard to ignore Trump's repeated criticisms.
"We're pretty sure that Jay Powell does not want to go down in history as the Fed Chair who was pushed around by an economically illiterate president", Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote to clients earlier this week.
"We have the tools to carry it about".