Fed does what it should, and Wall Street doesn't like it

Did something happened between 2 and 3pm Eastern today?

Oh, the Federal Reserve met today, and the coked-up hedge funders didn’t like what they had to say.

The Dow Jones Industrial Average fell 351.98 points and closed at its lowest level so far this year at 23,323.66, erasing a 380 point gain that came prior to the Fed decision. The broad S&P 500 index also closed at a 2018 low, falling 1.5 percent to finish at 2,506.96 as technology and banks stocks rolled over. The Nasdaq Composite fell 2.1 percent to 6,636.83, its own 2018 closing low with shares of Apple losing more than 3 percent.

For traders, the Fed’s statement and Chairman Jerome Powell’s subsequent press conference did not suggest that the central bank would slow its pace of rate hikes as quickly as some hoped. Markets took a leg lower during Powell’s comments that the central bank would continue to reduce the size of its balance sheet at the current pace.

The Dow and S&P 500, which are both in corrections, are on track for their worst December performance since the Great Depression in 1931, down more than 8 percent and 9 percent, respectively, this month. The S&P 500 is now in the red for 2018 by 6.3 percent.

The Fed decided to hike its benchmark overnight lending rate by one quarter point on Wednesday to a target range between 2.25 to 2.5 percent.

The Fed did however trim its 2019 outlook for rate hikes to just two increases from three previously.

I think the Fed had to raise rates, or else it would send the message that financial markets (and to a lesser extent, the economy) are already on the edge of disaster. And the trim of the Feds outlook for hikes in 2019 seems to be an admittance that a sizable slowdown and/or recession is a real possibility for next year (a view that is growing more common among economists).
And the action on the benchmark 10-year Treasury note did nothing to dissuade me from my belief that Wall Street is thinking recession, as it dropped as many as 8 basis points after the Fed announcement, before closing at its lowest yield in 7 months.

Not really the mark of confidence in an economy when you’re buying up 10-year Treasuries while the short-term rates go higher. It leaves us the closest we’ve been to rate inversion yet, with less than 0.4% between the 3-month and 10-year note, and only 0.14% for the 2-year/10-year spread.

The reason I bring up inversion is that it has a correlation with recession that hasn’t failed for decades.

As I saw more red streaking across the stock market this afternoon after the Fed made its announcement, this song came to mind.



We shouldn't be in full-fledged panic mode at this time, but you can see that train coming.