Markets are reeling after a ‘bizarre’ Fed surprise

REUTERS/Lucas Jackson

• The Federal Reserve surprised markets Wednesday by cutting its interest-rate forecast to zero hikes this year and just one in 2020.
• The US-China trade war appears set to linger after President Donald Trump said tariffs could stay in place for a “substantial period of time.”
• Brexit uncertainty has reached fresh levels over news that British Prime Minister Theresa May would request a three-month extension for Britain’s exit from the European Union.

Traders were left scrambling Wednesday after the Federal Reserve forecast zero interest-rate hikes this year and just one in 2020. Rising uncertainty over Brexit and new signs of a prolonged US-China trade war added to the market confusion.

Fed Chairman Jerome Powell said it could be “some time” before unemployment and inflation prompted a change in policy, according to Bloomberg. The central bank cut its growth forecast for this year to 2.1% from 2.3%. (The US economy expanded 2.9% last year.) The Fed also said that starting in September it would stop allowing $50 billion of Treasurys and mortgage-backed securities to roll off its balance sheet each month.

At the same time, President Donald Trump has signaled the US-China trade war may not come to a swift conclusion. On Wednesday he said tariffs on Chinese goods could remain in place for a “substantial period of time,” as his administration seeks concrete evidence that China will hold up its end of the bargain.

In Europe, further Brexit chaos is on the menu. British Prime Minister Theresa May on Thursday plans to request a three-month extension to Britain’s exit from the European Union — an option her EU counterparts previously ruled out unless she showed evidence of a Brexit deal that Parliament would support. The uncertainty could lead to a prolonged extension or an exit without a deal.

The Fed’s decision to signal a single interest-rate hike in 2020 is “bizarre,” said Naeem Aslam, the chief market analyst at TF Global Markets. “Investors should take the Fed’s decision with some pinch of salt” as “it would only take a couple of strong economic readings before we see the pressure building up again on the Fed,” he said.

While the Fed “kept insisting the economy was fine,” its actions “paint a distinctly less rosy picture,” said Jasper Lawler, the head of research at London Capital Group.

Still “spooked by market gyrations” in the fourth quarter of 2018, the Fed has “thrown in the towel,” said Neil Wilson, the chief markets analyst at Markets.com.

“What will be concerning investors behind their trading desks is…a coordinated downbeat view that is being presented by central banks and senior officials across the globe this year,” said Jameel Ahmad, the global head of currency strategy and market research at FXTM.

“The Fed has certainly now joined this party by issuing its own need for ‘patience’ and that global headwinds remain a threat that needs to be closely watched.”

Here’s the market roundup as of 9:15 a.m. (5:15 a.m. ET):

• US futures were flat, with those underlying the Dow, the S&P 500, and the Nasdaq no more than 0.1% up or down.
• European stocks were mixed, with Germany’s Dax down 0.2%, the Euro Stoxx 50 flat, and the FTSE 100 up 0.5%.
• Asian stocks broadly closed higher with the Shanghai Composite Index up 0.4%, the SZSE Component up 0.7%, and Japan’s Nikkei up 0.2%. Hong Kong’s Hang Seng was down 0.9%.

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