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Markets drop as Fed signals it’s not done raising interest rates yet

In a sign of confidence in economic growth, the Federal Reserve raised its benchmark interest rate by a quarter point, to its highest level in a decade. Fed chairman Jerome Powell said politics played "no role whatsoever" in the bank's decision. But a forecast of further increases next year prompted stocks to dive. Judy Woodruff talks to David Wessel of the Brookings Institution for analysis.

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  • Judy Woodruff:

    The Federal Reserve has raised its benchmark interest rate to the highest level in a decade. Today's increase was the fourth this year, in a bid to prevent a strong economy from fueling inflation.

    President Trump has sharply criticized the Central Bank, but Fed Chair Jerome Powell dismissed the attacks today.

  • Jerome Powell:

    Political considerations have — play no role whatsoever in our discussions or decisions about monetary policy. We're always going to be focused on the mission that Congress has given us.

    We have the tools to carry it about. We have the independence, which we think is essential to be able to do our jobs in a nonpolitical way. And we are — we at the Fed are absolutely committed to that mission, and nothing will deter us from doing what we think is the right thing to do.

  • Judy Woodruff:

    The Fed projected two more rate increases next year, one less than before.

    But Wall Street took it badly. The Dow Jones industrial average dropped more than 350 points to close at 23323. It had been up 380, before the Fed's announcement. The Nasdaq fell 147 points, and the S&P 500 slipped 39.

    Let's take a closer look at what Fed did today and at the market's big slump.

    David Wessel is the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. And he's a contributing columnist to The Wall Street Journal.

    David Wessel, welcome back to the "NewsHour."

    So, why did the Fed do what it did?

  • David Wessel:

    I think the Fed is looking at the economy and feels that it's pretty strong, and they think that unless they continue raising interest rates, it is, as you suggested, on risk of overheating.

    And I think the market was surprised by that, as we saw. The market expected them to, at least in their language, back off a little more than they did.

  • Judy Woodruff:

    What do they base it on? How do they know the economy is inherently so strong that they need to keep raising rates, putting the brakes on?

  • David Wessel:

    They don't.

    (LAUGHTER)

  • David Wessel:

    They have a forecast, and what Chair Powell said today was, we are — he keeps using this phrase data-dependent.

    What that means is, if the economy performs as we anticipate, if the stock market doesn't throw things upside down, if the rest of the world doesn't fall into some kind of global slump, then we expect the economy to continue to grow, and we are going to raise interest rates, as you said, another couple of times.

    But he also said that, if the economy doesn't perform as we expect, we're not going to do that. So I think he was trying to show that they have some resolve. They're not afraid of Donald Trump. They're not going to let the market push them around.

    But he was also trying to say, we're flexible. And we're at this point in the business cycle where there's a lot of judgment going on.

  • Judy Woodruff:

    So threading the needle — it's an overused phrase — but is that kind of what's going on?

  • David Wessel:

    Yes, I think so. I think so.

  • Judy Woodruff:

    You mentioned President Trump, and we mentioned that he's been critical of Chairman Powell, whom he appointed to this job.

    And Chairman Powell, Jay Powell, went out of his way today to talk about the fact that: We're not influenced by politics. We're independent.

    Why did he need to say that?

  • David Wessel:

    Well, he didn't — he said that in answer to a question. That was clearly an answer he had prepared because he knew that some reporter was going to ask it.

    I think the Fed believes that it's really important for their credibility with the rest of the world and particularly with the financial markets that people think they're doing what they think is right and not being pushed around by the president.

    And so, ironically, I think if it ever really comes to a really close call, do we raise interest rates in March or not, I wonder whether the Fed will be inclined to raise them just to show the president and the markets that they're being independent.

  • Judy Woodruff:

    So, the Fed is obviously aware of the financial markets. They had to assume the markets were going to drop after this announcement today, one would think.

    How much do the markets factor into the health of the economy?

  • David Wessel:

    Right.

    My guess is that they — I don't know, but I guess they were a little surprised by how much the market dropped today. I think they were trying to be measured in the way that central banks are.

    And what happens is, the Fed looks at financial conditions generally, and when the stock market falls as much as it has — it's fallen about 8 percent so far this month — that means that people who own stocks have less money, spend less readily, businesses will be less likely to invest, and people generally get more anxious.

    That acts as a brake on the economy, and the Fed knows that. So, they — that almost substitutes for an interest rate hike. So they can afford to be patient on interest rate hikes because the market is tightening for them.

    But we really don't know what will happen tomorrow. The market could be up 500 points tomorrow. So, they can't aim at the market. They're trying to aim at the economy.

    And I think one difference between the Fed and some of the people who follow this stuff is, does the market see something that the Fed doesn't? Is the market telling us that the economy really is slowing down or that President Trump's trade war is really doing damage to the economy?

    They don't seem to be very focused on the market as a predictor of the economy.

  • Judy Woodruff:

    And is that historically — has that historically been proven to be smart, for the Fed to pay less attention to the market?

  • David Wessel:

    I think, historically, it's proven to be right, usually. And the question always, is this time different? And we don't really know.

  • Judy Woodruff:

    Are there — David Wessel, are there others — the Fed was clearly under some pressure not to raise rates.

  • David Wessel:

    Right.

  • Judy Woodruff:

    So how much does this outside pressure affect what they do?

  • David Wessel:

    I think they say it doesn't affect them at all. But it has to affect them some.

    After all, President Trump is not the only person who was telling them not to raise rates in December. The Wall Street Journal editorial page, Larry Summers, the former treasury secretary, there are a number of people who think that there is no need to raise interest rates now. The world economy seems to be slowing. There still isn't very much inflation. Why not hold off?

    So I think they have to be aware of that, but I think they rely very much on their forecast of the economy and try to justify it to themselves that, we're doing the right thing, regardless of the political pressure.

  • Judy Woodruff:

    Well, we will watch. I know you will be watching, but we will see what the consequences of this move to increase rates today is.

  • David Wessel:

    Right. Right. For now, it means people who borrow will be paying a little more, and people who have money in money market funds will be getting a little more interest.

  • Judy Woodruff:

    David Wessel, thank you again.

  • David Wessel:

    You're welcome.

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