As expected, yesterday’s FOMC meeting saw a rate hike by 0.25% to 1.75%, and a statement implying two further quarter-point rate hikes this year. There had been speculation that the FOMC would lean towards three more 2018 hikes instead of two, which would have been bullish for the Dollar, but they stuck with two. Even though it is hard to measure the market’s reaction to any policy event which meets the consensus forecast, as this one did, the reaction to this has been a little strange. The U.S. Dollar fell moderately, which is logical, particularly against the British Pound, which is also logical as that currency is showing the greatest relative strength of all the majors. So far so good. It was the stock market’s reaction which has been surprising – stocks fell a little following the release, and continue to look weak, although it is only really at the market open later we will get a true picture of what the price is doing. Although the U.S. stock market is still technically a bull market in every way, this weakness troubles me and makes me wonder if we will see stocks go broadly sideways over the coming months. If the market responds like this to two further hikes, how would it have responded to three? Badly, most probably. Some analysts see the problem as the lack of inflation, which remains persistently low – shouldn’t there be more inflation if the Fed must raise rates? The FOMC projections were more bullish on GDP and unemployment, and the market reacted by falling a little. If the market continues to sell off today I would be even more worried for stocks. Yet there is a reason for this.
The stock market’s decline is less surprising when we consider another issue which is coming to the fore: President Trump’s tariffs, which are , hitting 10% of Chinese imports into the U.S.A. The Chinese have already said they will retaliate with equivalent measures targeted at hurting President Trump’s voter base, so we may be about to see at least a minor trade war. It seems the market sees this as more important as the FOMC release. How this issue plays out seems likely to determine the short-term future of the U.S. stock market.