The head of the International Monetary Fund on Thursday defended Federal Reserve Chairman Jerome Powell one day after President Donald Trump criticized the Federal Reserve, which has been raising U.S. interest rates, as "crazy".
But it amounts to good news for the long-term direction of the economy. And you don't see that inflation coming back.
The trade war that Trump seems willing to contemplate would cause enormous disruption to the USA economy, many of whose industries have organized themselves around supply chains that extend to China.
Rates took their latest spike higher amid a report Friday which showed the lowest unemployment rate in 49 years, along with rising wages.
Trump has repeatedly touted the spate of Wall Street records as proof of the success of his economic program, including his confrontational trade strategy, and criticized the Fed for raising the benchmark interest rate - three times this year - saying it would undermine his efforts. "It's a correction that I think is caused by the Federal Reserve with interest rates".
The Nasdaq has fallen 8.5 percent from its record closing high on August 29.
Since then, longer-term rates have risen faster than shorter-term ones. So even in Italy, which is in the midst of a budget crisis, the 10-year bond yield is just above 3.5 per cent - not much of a risk premium over Treasuries there.
Us stock market on Thursday began with the fall. "It's reflecting the possibility that this recovery has further legs". If we need to raise rates more than expected we can do that in a reasonable way.
Chinese internet group Tencent fell for the tenth consecutive day, dropping more than seven per cent through morning trade.
"Higher interest rates can prove problematic for companies and consumers alike, raising borrowing costs, and reducing the availability of credit", says United Kingdom stock broker Killik in a note to investors this morning. Higher interest rates are one of the multiple factors being blamed for the drop.
That may cause some heat for Powell, but it's unlikely to bother the financial markets. One way is the "discount rate" that the Fed charges member banks.
While the Fed has undoubtedly made mistakes in the past, it has spent decades cultivating its reputation for independence, and independence has been crucial to its ability to make a credible commitment to stable prices and thus the long-term health of the economy. With higher rates, businesses may not be able to do much. And inflation can be caused not just by policymakers actually printing money today, but also by the belief that they might do so in the future. Two thirds of the S&P 500 is in correction territory, he says, while over a quarter is in full bear market territory. "The trend is clearly up, and the market is betting that will continue".
Trump's comments and the stock slide "won't be enough to prevent the "crazy" Fed from raising rates again in December", Capital Economics analysts wrote on Thursday after the last consumer price data, which, while slightly below expectations, were still roughly in line with the Fed's plans.
Of course, there are downsides to the higher rates. Lower borrowing costs meant higher corporate profits.
Mortgage buyer Freddie Mac said Thursday the rate on 30-year, fixed-rate mortgages jumped to an average 4.90 percent this week from 4.71 percent last week.
They include the USA trade war with China and its potential impact on global growth, while rising bond yields have diverted attention from equities - stocks - which have been offering the most attractive returns for years because central bank stimulus had flooded markets with cheap money.
And markets, even deep and liquid ones like the bond market, aren't always right, and are frequently wrong. Tech stocks took a beating, sending the Nasdaq tumbling 4% - its worst day since the Brexit referendum of June 2016.