WASHINGTON (AFP) - The US central bank sent a strong signal on Friday (Dec 21) that it would be willing to reconsider expected interest rate hikes amid new data showing President Donald Trump's multi-front trade wars are dragging on the economy and shaking up investors.
The message, from the senior Federal Reserve official with the closest links to US financial markets, sent the Dow Jones Industrial Average surging 300 points. But the index later turned negative once again.
"I think we are hearing something important for markets and that is a concern around risks to the economy and potential slowdown," New York Federal Reserve Bank President John Williams said Friday on CNBC.
He stressed that the Fed is listening to the fears about the risks and will "be ready to reassess and re-evaluate our views and our policy stance."
It was a remarkable comment coming just two days after the Fed raised the key borrowing rate on Wednesday and signalled it will continue to hike next year, albeit at a slower pace, with only two increases projected.
The Fed has continued to forecast strong growth, which would support their case for tightening monetary policy, but the expected inflation spurt and rise in wages have not materialised.
Williams also tried to correct the market impression that two interest rate increases are set in stone for next year, highlighting a slight change of language in the policy statement issued on Wednesday.
The Fed's November statement said rate increases were expected, while now it "judges that some further gradual" hikes are in store, which Williams said "is not a commitment or promise in any way."
"Clearly the Fed is changing its tone and it's getting a little more dovish following the market reaction this week," said Adam Sarhan of 50 Park Investments.
"The Fed is blinking."
While the Fed continues to forecast solid growth, new government data released Friday revealed that falling exports and slower consumer spending and business investment are putting the brakes on economic growth in the second half of the year, while inflation is again falling.
US growth in the July-September quarter was slightly slower than previously reported, at 3.4 per cent, dragged down by the large drop in exports, the Commerce Department reported.
With hundreds of billions of dollars in goods hit by retaliatory tariffs, US exports fell by the largest amount since early 2009 at the height of the global financial crisis, according to the report, the third and final reading on third quarter GDP.
Trump's aggressive trade policies, and especially the tariff retaliation from China, has impeded exports, with soybean sales nearly grinding to a halt.
The strong US dollar also has made American goods more expensive.
The dispute with China, even with a ceasefire declared until March 1 for negotiations, has created fears of slowing US and global growth, and caused stock markets to retreat, with Wall Street wiping out all of the 2018 gains.
Gregory Daco of Oxford Economics said the data added to "evidence that business investment momentum continues to gradually cool."
"Looking ahead, we expect momentum to continue to fade as tailwinds from fiscal stimulus dissipate and rising headwinds from tighter financial conditions, slower global growth, reduced energy investment and heightened trade tensions start to weigh," he said in a research note.
Other data show fourth quarter growth is shaping up to be even more sluggish.
Purchases of durable goods - big ticket items like appliances, vehicles and machinery - rose in November compared to October, but much less than expected. That follows a big drop in October, and will drag on GDP in the final quarter of 2018.
Meanwhile, inflation the personal consumption expenditures price index, the Fed's preferred inflation gauge, was 1.8 per cent higher than in November 2017, back below the Fed's 2 per cent target, the Commerce Department reported.
The rate peaked at 2.4 per cent in July, but has move downwards since.
The slowdown in November was largely due to a drop in energy prices, but even excluding the volatile food and fuel categories, the index slowed to 1.9 per cent year-over-year.