This probably shouldn’t need to be said: The Federal Reserve hasn’t gone crazy.
Yet President Trump, who continues making the stock market’s performance a proxy for his own, blamed the Wall Street rout Wednesday on the central bank’s decision to continue gently raising interest rates. “The Fed is making a mistake. They’re so tight. I think the Fed has gone crazy,” Trump told reporters after the Dow Jones industrial average shed 3.1 percent, its steepest decline on a percentage basis since February. “So you could say that, well, that’s a lot of safety actually, and it is a lot of safety, and it gives you a lot of margin, but I think the Fed has gone crazy.”
The president appeared to be arguing that the Fed is hiking borrowing costs so that it can cut them again if the economy starts losing steam. And he chalked up the Wednesday sell-off to a “correction that we’ve been waiting for, for a long time.” And last night on Fox, he said he does not think tariffs with China played a factor. "I mean, I don’t know what their problem is, but.... it's ridiculous."
While Trump's jawboning is unusual for a modern president given the Fed's independence, there's another way to spin this politically. Trump could frame the Fed’s move toward normalizing rates as a badge of honor.
Federal Reserve Chairman Jay Powell — whom Trump picked, along with two of the three other Fed governors serving alongside him — has talked up the strength of the economy in explaining the moves: Interest rates are still low by historical standards, but low unemployment and solid growth have convinced Fed officials they can back off the easy-money standard they maintained for the better part of a decade while the economy recovered from the global financial crisis. The central bank is penciling in four more rate hikes through next year as it seeks to keep a lid on inflation and protect the economy from overheating.
Powell last week said economic forecasts are almost “too good to be true” and said the Fed's slow-and-steady hiking “reflects our efforts to balance the inevitable risks that come with extraordinary times.” Or the president could have declined to comment on the stock market’s drop Wednesday — or followed his own administration’s lead by putting it into context. As one senior administration official told CNBC’s Eamon Javers after the market close, “This is a bull market correction. It’s probably healthy. This will pass, and the U.S. economy remains strong.”
Market watchers not employed by the White House told me more or less the same thing. “We’re still pretty positive for the year, up 3 percent for the Dow and 4 percent for the S&P,” Brian Battle, director of trading at Performance Trust Capital Partners in Chicago, says. “It was a healthy correction. It wasn’t a panic. And it’s not unreasonable to think we’re priced a little high.”
Stephen Massocca, managing director of Wedbush Securities, said it was difficult to name a culprit for the market carnage. But he also wasn't sounding the alarm. “I don't think this is the start of something big,” he said. “I certainly don’t think it's the start of a bear market.”
But it's arguably tougher for the president to ignore the lows when he is also touting the highs, as he did last week:
The Stock Market just reached an All-Time High during my Administration for the 102nd Time, a presidential record, by far, for less than two years. So much potential as Trade and Military Deals are completed.— Donald J. Trump (@realDonaldTrump) October 3, 2018
“U.S. Stocks Widen Global Lead” pic.twitter.com/Snhv08ulcO— Donald J. Trump (@realDonaldTrump) October 4, 2018
And on the stump in Missouri late last month, Trump touted the benefits that a rising market is bestowing on 401(k)s, predicting that wealth will “evaporate” if Democrats win big in the midterms:
Kevin Hassett, the head of Trump’s Council of Economic Advisers, insisted Tuesday that the president isn't trying to politicize the Fed. “Part of President Trump’s brand is he says what he thinks, but he respects the independence of the Fed and that’s clear from his nominations,” Hassett said at Council on Foreign Relations, per my colleague Damian Paletta. “I think our nominees have been absolutely first rate.”
And International Monetary Fund Managing Director Christine Lagarde on Thursday defended Powell from Trump's criticism. “I would not associate Jay Powell with craziness,” she told CNBC at the IMF and World Bank annual meetings in Bali. “No, no, he comes across, and members of his board, as extremely serious, solid and certainly keen to base their decisions on actual information, and decide to communicate that properly.”
Treasury Secretary Steven Mnuchin, also in Bali, likewise sought to put Wednesday's sell-off in context. “The fundamentals of the U.S. economy continue to be extremely strong, I think that’s why the stock market has performed as well as it has,” he told Bloomberg News. “The fact that there’s somewhat of a correction given how much the market has gone up is not particularly surprising.” (As Damian notes, Mnuchin helped sell Trump on Powell to chair the Fed, arguing he'd be a force for stability.)
Then again, up close, the market dive Wednesday looked bracing. A survey of the damage:
— Every stock in the Dow lost ground, per Fortune’s Jen Wieczner, and only 17 in the S&P 500 managed gains, “largely recessionary favorites like Dollar Tree (up 1.7%) and Dollar General (up .5%), J.M. Smucker and General Mills (each up about 1.5%), and Campbell Soup (up .5%).”
— The Nasdaq’s 4 percent drop was its worst percentage decline since the Brexit vote in June 2106.
— While the Dow’s 823-point drop was the third-worst point decline in its history, the number means less as the index continues to climb. On a percentage basis, its Wednesday drop was just a fraction of the 23 percent the index shed on Black Monday in 1987, for example.
— Facebook, Amazon, Netflix, and Google parent company Alphabet — the so-called FANG stocks that have helped power the market’s rise — together dropped 6 percent, their sharpest decline since 2012. Per Bloomberg, they saw $125 billion of their value erased, “more than roughly 460 companies in the S&P 500 are individually worth.”
— The CBOE VIX Index, Wall Street’s “fear gauge,” jumped 44 percent, its largest jump since February. It closed at 22.96, well short of its February peak of 37.32.
— The world’s 500 wealthiest people lost a collective $99 billion. Hardest hit was Amazon CEO and Washington Post owner Jeff Bezos, who lost $9.1 billion. (He’s still worth $145.2 billion, according to Bloomberg’s Billionaire Index.)
And there was one potentially worrying sign in something that didn’t happen Wednesday. In big sell-offs, investors typically flee to the safety of Treasury bonds. “But that's not the case now, since Wednesday's sharp plunge in stocks is actually happening because investors have been selling longer-dated Treasurys,” CNBC’s Patti Domm writes. “Analysts say the unusual trade could be a warning that there will be more stock market selling ahead, or at least until investors get scared enough to jump back into Treasurys and markets steady.”
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— Sell-off widens. The Post's Anna Fifield and Gary Shih: "A sell-off on Wall Street infected markets in Asia and Europe on Thursday as investors from China to France reacted to fears that rising U.S. interest rates will lead to slower growth in the world’s largest economy. China was among the hardest hit, with indexes in Shanghai and Hong Kong falling 5.2 and 3.5 percent, respectively. More than a quarter of stocks on the Shanghai exchange fell by their 10 percent daily limit, according to Bloomberg, as the Shanghai Composite Index hit lows not seen since 2014.
"The tech-heavy TWSE index in Taiwan plummeted 6.3 percent, while Japan’s Nikkei slid nearly 4 percent and the South Korean KOSPI index dropped 4.4 percent as foreign investors pulled out... The Stoxx Europe 600 also slumped by 1.7 percent in early trade, weighed down by a drop in tech companies, with London’s FTSE 100 down by a similar percentage."
— Fed's Williams: Rate increases reduce risk. Bloomberg News: “U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said. ‘The primary driver of us raising interest rates is just the fact that the U.S. economy is doing so well in terms of our goals,’ Williams said Wednesday in a reply to questions after a speech in Bali, where the annual meetings of the International Monetary Fund and World Bank are taking place. ‘But I would also add that the normalization of monetary policy in terms of interest rates does have an added benefit in terms of financial risks.’ ‘A very-low interest-rate environment for a long time does, at least in some dimension, probably add to financial risks, or risk-taking, reach for yield, things like that,’ he said. ‘Normalization of the monetary policy, I think, has the added benefit of reducing somewhat, on the margin, some of the risk of imbalances in financial markets.’ ”
— New restrictions on foreign investment. The Post's Damian Paletta: “The Treasury Department on Wednesday said it would soon begin imposing new limits on foreign investment into U.S. technology, giving [Trump] new powers in his trade battle with China. The new restrictions, which go into effect Nov. 10, are part of a pilot program authorized by the Foreign Investment Risk Review Modernization Act, a law passed with bipartisan support earlier this year. It aims to give the government more power to block foreign, non-controlling investments in ‘critical technologies’ that are considered nonpublic, technical information. . . . The new rules don’t prohibit foreign investments in U.S. companies, but they require investors to notify the government that they are seeking to take a non-controlling stake, giving the Treasury Department the opportunity to review any deal. Failing to notify the government could lead to a fine, Treasury said.”
— Goldman Sachs: U.S. could accuse China of currency manipulation. Bloomberg News's Katherine Greifeld: “Goldman Sachs isn’t ruling out that the U.S. might label China a currency manipulator in a report due next week. Though China doesn’t meet the three official criteria, the Treasury Department could still accuse the Asian nation if it found that China was manipulating the yuan for trade purposes, Goldman notes. While not the bank’s base case, given that currency matters have played a ‘central role’ in the U.S.-China trade standoff, a formal declaration isn’t unfathomable. ‘Naming China a currency manipulator does not seem like the logical next step at this point,’ currency strategist Michael Cahill wrote in an Oct. 10 note. ‘That said, the administration’s continued focus in this area means we cannot rule it out.’ ”
— World Bank, IMF to U.S. and China: Cool it. AP's Elaine Kurtenbach: "The heads of the World Bank and IMF on Thursday urged the U.S. and China to play by world trade rules and de-escalate a dispute over Beijing’s technology development strategy that threatens to do lasting damage to the global economy. Christine Lagarde, managing director of the International Monetary Fund, said she would advise Beijing and Washington to cool down, fix aspects of the world trading system that need fixing and 'don’t break it.' ... Asked about the escalating dispute between the U.S. and China, Lagarde said that so far there had been no 'contagion' of major damage from penalty tariffs imposed by the two countries on each other’s exports, but that they do risk hurting 'innocent bystanders.'"
— Huge Chinese companies keep growing. Bloomberg News: “In most countries, only a handful of financial institutions are large enough to warrant a ‘too big to fail’ label. China isn’t most countries. After a decade of runaway credit expansion and regulatory loosening, the nation’s $40 trillion financial system is teeming with giants. Not only have China’s biggest financial companies kept growing bigger and more complex, but formerly little-known firms are now some of the largest on Earth. . . . It’s no wonder Chinese authorities are getting antsy. They’re planning to increase the number of companies deemed big enough to become systemically important financial institutions, people familiar with the matter said on Wednesday, a designation that would make the firms subject to extra capital requirements.”
- “Trump talked with Jeff Sessions’s own chief of staff about replacing him as attorney general.” The Post’s Matt Zapotosky and Josh Dawsey.
- “FBI chief says Kavanaugh check was ‘limited’ but met standards.” WSJ's Byron Tau.
— Voters split on Trump's taxes. Politico's Toby Eckert: “Fewer than half of voters care that [Trump] hasn't released his tax returns, even as more than 60 percent said they were aware of a recent report alleging he had participated in tax fraud, according to a new POLITICO/Morning Consult poll. Forty-eight percent of respondents said they cared about Trump not releasing his returns, while 43 percent said they didn't care.”
— Workers in high demand ahead of holidays. AP's Christopher Rugaber and Anne D'Innocenzio: “Companies that depend on holiday season sales need more workers at a time when the ranks of the unemployed have dwindled to their lowest level since the recession. Envisioning an even tougher struggle than they’ve had in recent years, many companies are taking steps they’ve not tried before. More of them are offering higher pay. They’re holding national hiring days. They’re dangling bonuses. They’re providing more full-time, rather than part-time, work. Some warehousing companies that fear they still won’t be able to fill enough jobs, are turning to automation . . . With more job seekers able to choose among employers, many companies have rushed to begin their seasonal hiring earlier than before.”
— AFL-CIO employees criticize new contract. The Post's Danielle Paquette: “The biggest federation of unions in the United States has called on companies this year to raise worker pay amid a flourishing economy. But now employees of the AFL-CIO say the labor group isn’t practicing what it preaches — and they’re prepared to picket over it. About 50 janitors, drivers, secretaries and accountants at the union’s offices in greater Washington, all represented by the Office and Professional Employees International Union (OPEIU), voted Tuesday to authorize a strike if their employer does not meet their demands. The workers, two thirds of whom are older than 50, say the AFL-CIO offered them a new contract in September that included a three-year pay freeze, less reliable hours, cuts to sick leave and weaker seniority rights. After they rejected those terms, the AFL-CIO notified them Monday it would impose the contract.”
— Chamber touts tax cuts in Senate ads. The Hill's Lisa Hagen: "The U.S. Chamber of Commerce will launch new TV and digital ads in Arizona and Tennessee on Thursday, highlighting the Republican Senate candidates’ votes to pass the GOP tax law. The new ads, which were shared first with The Hill, are the Chamber’s first foray into both Arizona and Tennessee, home to two competitive Senate races that Republicans are looking to defend in November. Reps. Marsha Blackburn (R-Tenn.) and Martha McSally (R-Ariz.), who are running in top Senate races this cycle, both voted in favor of the GOP’s tax plan, which was signed into law late last year. Republicans are looking to protect — and try to expand — their 51-49 seat majority."
— Wells Fargo mounts Washington charm offensive. Reuters: "Tired of being cast as the poster child for big banks behaving badly, Wells Fargo & Co has been expanding its presence in the nation’s capital to convince lawmakers it has changed and talking up its charitable work in their districts. In the past the bank’s lobbying efforts had been modest, but over the past 18 months, Wells Fargo has added more than 15 people to its Washington team, tripling its size, and is still hiring. The bank has also contracted big-name firms including Ogilvy and Federal Street Strategies, whose principals previously worked for powerful lawmakers, financial regulators or [Trump]... Wells Fargo has also been highlighting millions of dollars spent on programs dedicated to homelessness, housing for veterans and financial literacy in key lawmakers’ districts to win back their favor, bank representatives said."
— Roubini to Senate: Crypto is a scam. MarketWatch’s Aaron Hankin: “Prominent bitcoin detractor Nouriel Roubini, a professor of economics at the New York University Stern School of Business, has, not for the first, nor probably the last, time denounced the emergent technology that is blockchain and cryptocurrencies. In a prepared testimony for a Senate Banking Committee hearing Thursday, the Turkish-born economist, known colloquially as ‘Dr. Doom’ for his seemingly permanent bearishness, said digital currencies are the ‘mother of all bubbles’ and, in fact, have entered an apocalypse… Citing scalability issues and a lack of decentralization, the bitcoin skeptic adds blockchain technology is ‘nothing better than a glorified spreadsheet or database.’”
His testimony (which you can read in full here) comes as the SEC is widening its crackdown on certain initial coin offerings, “putting hundreds of cryptocurrency startups at risk,” Yahoo Finance’s Dan Roberts writes. “The SEC sent out a slew of initial information-seeking subpoenas at the start of 2018. Now the agency has returned to many of those companies, and subpoenaed many more—focusing on those that failed to properly ensure they sold their token exclusively to accredited investors.”
- Securities and Exchange Commission open meeting.
- Senate Banking Committee hearing on cryptocurrency and blockchain.
- The Bipartisan Policy Center hosts an event titled “Reference rate reform: impact on the economy and consumers.”
- Senate Banking Committee hearing on “oversight of pilot programs at Fannie Mae and Freddie Mac” on Oct. 18.
— From the New Yorker's Pia Guerra:
Jamal Khashoggi supporters urge Trump administration to investigate disappearance:
Hurricane Michael lashes Florida's Gulf Coast:
Russian town hires cat chief to keep strays happy: