DoubleLines Gundlach: Rates a big part of sell-off

Ivan Schwartz
October 12, 2018

Those financial crisis-inspired programmes - such as quantitative easing - are now ending and the Fed has raised USA interest rates three times already this year - raising borrowing costs - and could add a fourth hike by the end of 2018.

The Dow tumbled 546 points (2.1 per cent) on Thursday amid heavy selling. BSE Sensex today lost over 1,000 points at one point.

The broad-based S&P 500 also dropped 2.1 percent to 2,728.26, while the tech-rich Nasdaq Composite Index fell 1.2 percent to 7,330.26.

"There are a number of worries for investors right now, from the pace of rising bond yields and the impact on investor sentiment, to Italy's populist coalition playing a game of chicken with the European Commission, stalling Brexit negotiations and the ongoing trade conflict between the USA and China", said Craig Erlam, senior market analyst at Oanda trading group. "They're so tight. I think Fed has gone insane", he said.

"The Fed has gone insane", he told reporters on Wednesday as he arrived in Pennsylvania for a campaign rally. "I think what they're doing is wrong", Trump said. But markets at the time reacted positively to the rate increases and continued to push upwards, reaching even higher valuations as the agency doubled down on rate increases When the markets did finally crash in 2007, the catalyst was not a further decline in Fed rates but the fall of investment bank Bear Stearns.

"All over the world, it is certainly a good principle to have independence of the central banks and of the central bank governors".

Earlier in the day, Trump told the Fox & Friends television broadcast that the central bank was 'making a big mistake'.

While acknowledging that higher rates helped savers, he criticised the Federal Reserve's moves.

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President Donald Trump signaled his anxiety about the Federal Reserve's plan to keep raising interest rates into 2019 after stocks plunged on Wednesday.

The rout caused a domino effect worldwide, with losses spreading to Asia and Europe as investors remained concerned about rising rates - which would send more buyers out of equities and into bonds - as well as the impact of Trump's trade conflict with China on corporate profits.

Ward McCarthy, chief financial economist at Jefferies LLC in NY, said Trump's comments wouldn't influence Fed policy making. He didn't say anything remotely like that, ' he said on CNBC. Republican critics tend to want the Fed to raise rates more quickly, not more slowly.

Trump has repeatedly touted Wall Street records as proof of the success of his economic programme, including his confrontational trade strategy. Trump's remarks on Thursday were the latest in series of recent barrages he has unleashed at the Fed.

In the face of the repeated attacks, Mr Powell said central bankers did not pay attention and are "quite removed from the political process".

During a PBS interview last week, Fed Chair Jerome Powell said accommodative interest rates, or low rates to encourage economic growth, were no longer needed.

"And we just try to do the right thing for the medium and longer term for the country", said Mr Powell.

Speaking at the IMF and World Bank annual meetings in Indonesia (as was Frenkel), IMF managing director Christine Lagarde said she "would not associate Jay Powell with craziness", and Powell's counterpart at the Bank of England, Mark Carney, said Powell was "an individual that really understands the plumbing of the USA and global financial systems". "I mean, I don't know what their problem is but they're raising interest rates and it's ridiculous".

Other reports by GizPress

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