The Fed Vs. the Markets
If you had any doubt the Fed and markets see two completely different economies, today’s action should put that to rest. If the economy were a TV show, the Fed would see “House Hunters” while the stock market sees “The Haunting of Hill House.”
Stocks tumbled hard for a second straight day, with the Nasdaq Composite Index briefly dipping into bear-market territory. Meanwhile, the yield curve – the gap between two- and 10-year Treasury yields – shrank nearly to zero, on the edge of going negative and signaling a recession. Unlike yesterday’s freak-out, which was mostly about the Fed not being as freaked out as the stock market is, today’s was brought to you partly by President Donald Trump pushing the government closer to a shutdownover border-wall funding.
Whatever the reason, it’s more evidence markets are panicking like Private Hudson in “Aliens,” in stark contrast to the calm optimism the Fed displayed yesterday when it raised its key policy rate and said it planned to raise rates twice again next year. Mohamed El-Erian writes the Fed can’t win, after nearly a decade of being unable to lose. For years, a sluggish economy let the Fed keep pressing on the gas, helping the market boom. Now the economic data are fine, and the Fed feels it must get policy back to normal, but the markets are in crisis. It’s as if, John Authers writes, traders suddenly realized “quantitative tightening” – the opposite of the Fed’s crisis-era policy of “quantitative easing” – is as bad for markets as QE was good.
And really, as Robert Burgess writes, even if the Fed had surrendered to the market’s point of view, that probably wouldn’t have helped. Stocks seem determined to fall. This month is well on track to be the second-worst December of all time for the market. And a bad December, Bob notes, is often an omen of a bad year to come. Scary stuff.
China Shouldn’t Fear a Strong Yuan
One of the goals of the Trump administration’s trade war with China seems to be to force that nation to let its currency appreciate. A stronger yuan would make Chinese manufactured goods less competitive in the global market, for one thing. China is not a fan of this for a few reasons, one of which may be the belief that the Plaza Accord of 1985, in which Japan and others agreed to let their currencies rise, wrecked Japan’s economy. Noah Smith examines this idea and finds it sorely lacking. In fact, evidence suggests Japan’s currency appreciation had no noticeable effect on its economy or trade imbalance – meaning a similar move might not be the big win Trump wants either.
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