Uncertainty abounds at the end of a volatile year: Investors question the Federal Reserve’s plans for 2019, and President Donald Trump asked aides if he could fire Fed Chairman Jerome Powell. Congress entered a budget stalemate with the president, partially shutting down the government. Trade policy that for years tried to stitch economies together is in retreat. Economists warn that the pace of US economic growth will slow next year.
Investors are now worried about five big items going into 2019.
1. Mnuchin may know something we don’t. Or not
Mnuchin used crisis language when he said banks have “ample liquidity” and “markets continue to function properly.” No outward signs pointed to a crisis, contagion or liquidity concern in the financial system. Suggesting as much jolted the stock market.
Trump has complained that Mnuchin hasn’t done enough to stabilize markets, according to a person familiar with the matter. The statement left observers wondering: Was Mnuchin trying to placate Trump, or does he know something the markets don’t know?
2. The mix of higher rates and slowing economy growth
Businesses and investors were already on high alert because rates are going up as economic growth is slowing. They have good reason to worry that Powell’s Fed may be too aggressive on its rate increases. The Fed lowered its growth estimate for the US economy last week, and it is notoriously horrendous at predicting recessions.
If it raises rates too quickly, the Fed could artificially slow the economy or even bring about a recession. Inflation is not currently a problem, so the central bank has the ability to slow its rate-raising pace if it wants.
3. Trouble at the Fed
Investors may not like the uncertainty that higher rates could bring — but firing the Fed chair 10 months into his term would be a different can of worms entirely.
4. Shutdown showdown
Far more meaningful than a shutdown is Congress’ duty to lift the debt ceiling later next year.
After starting to recover after the Great Recession, federal deficits are rising again — and that means Treasury will have to borrow more to make up the gap between what the government spends and brings in. Lawmakers must pass a law next year so Treasury can continue to borrow without any restrictions. If they fail, the government could default on its debt.
The Trump administration is threatening to raise tariffs on billions of dollars worth of Chinese goods if China fails to meet US demands on a variety of economic and political issues.
Trade has dominated much of the conversation in 2018. It says a lot about the chaos in Washington that trade is currently the least of the market’s concerns.