Welcome back to the second special weekly edition of Axios Markets. Dion Rabouin joins us this week to lead our markets coverage and kicks off analysis of Fed day. Your friends can sign up for Axios Markets here.
Breaking: As expected the Fed raised interest rates 25 basis points. Chairman Jerome Powell speaks to reporters at 2:30pm. Axios' Courtenay Brown will be in the room to ask if he "feels" the market. Check the stream on Axios.com for updates.
Illustration: Rebecca Zisser/Axios
The Fed's "dovish lite" rate hike today is a key moment in chairman Powell's balancing act.
Why it matters: The Fed signaled today two more hikes next year instead of three while reiterating that "risks to the economic outlook are roughly balanced," but for the first time noted it will "monitor global economic and financial developments and assess their implications for the economic outlook."
Between the lines: Having worked as an investment banker at Dillon Read & Co. and The Carlyle Group, Powell is much closer to the markets than his predecessors. And Wall Street has been clamoring for the Fed to slow down.
Powell learned from former Fed chairs Ben Bernanke and Janet Yellen, who both faced hostility from Congress and the public, to keep a low profile.
He's also made it a major point to woo Congress, with 60 personal visits and one-on-one phone calls to lawmakers, according to his most recent public calendars from February to August.
"He wants as strong a political base as he possibly can, and he also wants to not be blamed for stuff. The way you don’t get blamed for stuff is to not make promises about your future actions."— Vincent Reinhart, a former Fed official and now chief economist at Standish, a division of BNY Mellon, told Dion
What's next: Don't expect Powell to kowtow to Trump's tweets, but the awful performance of the stock market in December has to have changed his thinking somewhat. His strategy appears to be endearing himself and the U.S. central bank to Wall Street and Capitol Hill.
The Fed's dual mandate — delivering both maximum employment and low inflation — requires a balancing act, Axios' Felix Salmon points out: Low interest rates help to bring down unemployment, but according to economic theory, they also risk causing inflation. In reality, thanks largely to China, inflation has not been a problem for decades.
The temptation, then, is always to keep interest rates very low, as President Trump desires.
The only way to prevent another catastrophic asset bubble is to allow interest rates to revert to something much more normal. That's what the Fed is doing today.
The bottom line: In the 50 years before the financial crisis, the real Federal Funds rate was positive more than 80% of the time. Its recent return to positive territory, for the first time in over a decade, is something to be welcomed.
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"I'll just conclude by saying most of the issues that we're dealing with today are induced by bad political choices ... I mean, making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So you just go down the list, and they're all the things that have created macroeconomic slowdowns."— FedEx CEO Fred Smith on an earnings call yesterday
There are 7 million unfilled job openings in the U.S. and the unemployment rate is below 4%.
Our thought bubble from Dion: This theoretically gives the Fed a lot more room to raise before there will be employment impact. The labor market today is tighter than in 2006 when the Fed funds rate was 5.25% and 2000 when the rate was as high as 6.5%. Former Fed chairman Alan Greenspan said in October that this was the "tightest labor market [he'd] ever seen."
Unlike its peers on Wall Street, Oppenheimer is putting off its 2019 S&P 500 forecast until this bout of volatility runs its course.
Considering Credit Suisse has already cut its S&P target for next year to 2,925 from 3,350, Oppenheimer's approach makes sense. But it also speaks volumes about analysts' eagerness to win the S&P 500 target contest.
The commentary atop the IEA's monthly oil market report a week ago was headlined "A floor under prices?" That question mark is doing lots of work, writes Axios energy reporter Ben Geman.
Where it stands: Prices plummeted several dollars per barrel this week despite the OPEC+ efforts to stabilize the market.
The big picture: Concerns about slowing economic growth and trade battles are eating into demand. The robust amount of crude sloshing around and broader market woes are creating downward pressure on prices.
What they're saying: “The market is experiencing price carnage, maximum pain and considerable downside pressure,” Robin Bieber of the brokerage PVM oil tells Reuters.
A Tesla travels in a Boring Co. tunnel beneath Los Angeles at yesterday's unveiling. Photo: Robyn Peck/AFP/Getty Images
“We’re not saying stop all other solutions, but we think this is the only solution that will actually work.”— Elon Musk repurposing a Tesla as the world’s smallest passenger train
Happy Holidays! We'll be back Jan. 2 with a markets lookahead and in your inbox daily starting the morning of Jan. 7.