NEW YORK – With Federal Reserve officials again openly telegraphing the likelihood the Federal Open Market Committee will raise interest rates in December, the August stock market selloff that followed China’s decision to devalue the yuan resumed.
The Dow was down more than 100 points by mid-day Friday, with the widely read economic blog ZeroHedge.com pointing out the index has lost nearly 600 points from last week’s highs and has moved below its 200-day moving-average.
The stock market tumble threatens to turn the Dow into losses on the year, giving up virtually all gains equity owners have enjoyed since Federal Reserve ended QE3 in October 2014.
Technically known as Quantitative Easing No. 3, it was the last round of the Fed printing money to buy U.S. Treasuries in an effort to stimulate economic growth by keeping interest rates at or near zero.
Meanwhile, investors fear a “global debt bomb” is about to go off as the Obama administrations resumes the rapid accumulation of federal borrowing. The federal government is now on track to nearly double the federal debt during President Obama’s tenure to a total of $20 trillion.
The Wall Street Journal, noting that the Federal Reserve has not allowed interest rates to increase since 2006, reported that about 92 percent of the business and academic economists polled by the newspaper expect the Fed to lift rates next month.
“Every time the market comes face to face with the fact that we will no longer have zero interest rates, it struggles,” Jim Dunigan, chief investment officer at PNC Wealth Management, explained to the Wall Street Journal.
In September, WND reported Federal Reserve Chairman Janet Yellen, in a surprise move, announced the Federal Open Market Committee had decided not to raise its key interest rate, triggering a 250-point swing in the Dow that reflected investor uncertainty whether the decision was good news or bad.
WND also reported in September that Deutsche Bank, the European Union’s biggest bank, warned the Federal Reserve that a rise in U.S. interest rates would amount to a “premeditated controlled demolition” that could cause global stock markets to collapse as much as 40 percent.
At the end of March, Yellen indicated that the Fed had not done enough to combat unemployment even after holding interest rates near zero for more than five years and engaging in quantitative easing.
Yellen’s remarks were widely interpreted by investors as a signal the Fed would continuing buying U.S. debt for the foreseeable future.
Under Yellen’s direction, the Fed tapered QE, reducing by $10 billion a month the amount of U.S. debt it purchases. In January, WND reported fears that tapering QE to zero could cause interest rates to rise, risking a severe market correction.
Recent concerns about margin debt nearing $500 billion have added to concerns QE may be coming to an end, with a downward market adjustment becoming more likely in the next few months.