Market turbulence is leading some investors to call on the Federal Reserve to halt its campaign of interest rate increases, but the selloff in stocks and corporate bonds that accelerated Tuesday is unlikely to stop the central bank from raising rates when it meets again next month.
Fed officials have signaled in recent days they plan to proceed with another quarter percentage point increase in their benchmark short-term interest rate when they meet Dec. 19, marking their fourth rate increase this year. The market pullback does underscore however the uncertain outlook for what the Fed will do after that.
Fed officials are divided over how many times the central bank will raise rates next year. Projections released after the Fed’s meeting in September showed officials are roughly equally split over whether the economy will require two, three or four rate rises next year. Officials will update their projections when they meet in December. Some officials could reduce their estimates for the number of rate increases required next year if the market rout continues, or if their expectations for growth or inflation next year recede.
The Dow Jones Industrial Average fell sharply Tuesday to its sixth drop in eight trading days, a move that has wiped out its gains for the year. The stock-market selloff of the past fewmonths has been accompanied by a rise in theyield demanded by bond investors.
For the Fed to change its December plan, the market selloff would likely need to signal some broader deterioration in the U.S. outlook. Recent economic data shows few signs of a slowdown outside of the rate-sensitive housing sector. A continued run of strong labor-market data, in particular, would make it difficult for the Fed to justify a pause.
“Interest rates are still very low. We’ve raised them, but they are still at a very low level,” said New York Fed President John Williams on Monday. He reiterated the Fed’s plans to pursue a “gradual path” of rate rises.
Some investors worry that recent troubles in stocks and bonds could portend more economic weakness in the U.S. and abroad than Fed officials are counting on, and that a rate increase in that environment would be dangerous.
“I would pause and see if the market knows something we don’t,” said Stanley Druckenmiller, who once ran George Soros’s hedge fund and today manages his own money. He has been a vocal critic of the Fed’s reluctance to boost rates in recent years and other efforts to stimulate the economy. But he points to a number of signs of trouble in the market as reasons to hold off on a rate increase next month.
In recent weeks, Ray Dalio, founder of $160 billion hedge-fund firm Bridgewater Associates LP, has argued that the Fed’s interest-rate hikes will hurt asset prices, and that such share weakness will in turn undercut the economy. He’s also spoken of the risks of boosting rates, partly because the Fed is in an unusually weak position to aid the economy if a downturn results and such help becomes needed, partly because interest rates remain quite low.
Complicating matters for the Fed is the fact that President Donald Trump has been calling on the central bank to halt interest rate increases. Some investors might interpret a central bank decision to stop now as a bend to political pressure, which would hurt the Fed’s inflation-fighting credibility.