An attempt by Treasury Secretary Steven T. Mnuchin to calm plunging financial markets backfired Monday, further rattling investors with new fears about whether major U.S. banks have enough cash on top of worries about interest rates, political instability in Washington and a slowing global economy.
Mnuchin’s comments preceded the worst Christmas Eve performance on record for the Standard & Poor’s 500 index and the Dow Jones industrial average, according to data compiled by Bloomberg and FactSet.
The S&P 500 fell 2.7% in shortened, preholiday trading Monday, digging itself deeper into the red. Last week, the index had its biggest weekly drop since the 2008 financial crisis, and it’s down nearly 20% from its September peak. The Dow fell 653.17 points Monday, or 2.9%, to 21,792.20.
Adding to the volatile mix was a fresh attack on the Federal Reserve by President Trump, who declared that the central bank was the U.S. economy’s “only problem” and that it didn’t “have a feel for the market.”
“The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” Trump said on Twitter.
The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch - he can’t putt!— Donald J. Trump (@realDonaldTrump) December 24, 2018
“It seems like the government and [Trump’s] advisors can’t get out of their own way,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors in Chicago. “Already there’s a fair amount of uncertainty or lack of confidence in their ability to lead, and Mnuchin’s move just reinforced that concern.”
As a partial federal government shutdown entered its third day, two top Democrats blamed Trump for “plunging the country into chaos.”
“The stock market is tanking and the president is waging a personal war on the Federal Reserve — after he just fired the Secretary of Defense,” said a joint statement from House Democratic leader Nancy Pelosi and Senate Democratic leader Charles E. Schumer.
One of the triggers for last week’s selloff was the decision by Fed officials to inch up the central bank’s key interest rate Wednesday. It was the fourth small hike this year, bringing the short-term federal funds rate — which is used as a benchmark for credit cards, auto loans and other consumer lending — to a still historically low range of 2.25% to 2.5%.
Fed Chairman Jerome H. Powell and other Fed officials signaled that they expect to raise interest rates more slowly next year. U.S. economic growth is projected to decelerate to a still-solid pace.
On Sunday, Mnuchin issued a surprising statement saying that he had personally called the chief executives of the nation’s six largest banks and that they “confirmed that they have ample liquidity available for lending to consumer, business markets, and all other market operations.”
Mnuchin also said he planned to hold a conference call Monday with key regulators who are part of the President’s Working Group on Financial Markets “to discuss coordination efforts to assure normal market operations.”
Despite the stock market’s steep declines, there had been no concerns about whether banks had enough cash or that financial markets were not functioning normally. Mnuchin’s statement sent up red flags.
“From all indications, Secretary Mnuchin was attempting to ease market concerns but very well did the exact opposite,” said Andrew Kositkun, foreign exchange analyst at City National Bank in Los Angeles.
“While the stock market has sold off sharply, there wasn’t really any concerns about liquidity,” he said. “However, the markets are very much on edge, leaving some wondering if there is something Mnuchin knows that the markets don’t, especially given that the easier way to check on liquidity would be to call [Fed Chairman] Jay Powell.”
Treasury Department officials did not respond Monday to requests for comment on Mnuchin’s call with regulators.
The stock market declines, while steep, have been typical of a bear market in which indexes fall at least 20% from their recent peaks, analysts said. The S&P 500 was just about in a bear market after Monday’s declines. The Dow is off nearly 19% from its record high, which it set in October.
The technology-heavy Nasdaq composite, which slid 2.2% on Monday, is well into bear market territory. It has declined almost 24% from its August record high.
A lack of liquidity at banks would be similar to what happened in the fall of 2008, when the collapse of the housing market and securities backed by toxic mortgages led to bank failures and nearly caused a meltdown of the financial system. Federal Reserve officials stepped in to provide emergency lending, and Congress authorized $700 billion to bail out banks.
“There’s a big difference between a bear market and an illiquid market,” said Kathy Bostjancic, head U.S. financial market economist at consulting firm Oxford Economics. “When you have an illiquid situation, that ignites outright panic, forced selling and much worse. It can make the bear market much steeper, like a bank run. You’ve ignited panic in investors’ minds.”
Another key concern among investors came from reports over the weekend that Trump had discussed whether he could fire Powell. Trump has leveled unprecedented public criticism at Powell for interest rate hikes even though the nation’s economy has been growing strongly this year, which normally causes the Fed to inch up its key rate.
Trump handpicked Powell to be chairman of the Fed, which operates independently and is supposed to ignore political concerns and make monetary policy decisions based on what’s best for the U.S. economy. Some developing nations have allowed politicians to direct monetary policy, with disastrous results for their economies and investor confidence.
Powell’s term as a Fed governor does not expire until 2028, and his four-year term as chairman lasts until February 2022. Both positions required Senate confirmation.
U.S. law says a Fed governor can only be removed “for cause.” Many experts say that means unlawful activity or other malfeasance, although the statute does not provide a definition.
Bostjancic noted that Congress created the Fed to be independent. So, she said, “one would presume that ‘for cause’ doesn’t include policy decisions the president disagrees with.
“It must be much more than that,” she said.
On Saturday, Mnuchin tweeted a quote from Trump that said although he thought the Fed’s monetary policy actions have been “an absolute terrible thing … I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.”
But Trump’s continued attacks on the Fed, along with his penchant for reversing course and making rash decisions, continued to fuel fears about Powell’s fate.
Although government data continue to show that the economy is in solid shape, the stock market declines could slow growth by affecting confidence as well as decision-making on investments, hiring and spending, said Joshua Feinman, chief economist and managing director of Deutsche Asset Management in the Americas.
“There’s been a growing divergence between what appears to be still pretty sound economic performance and the signals we’ve been getting from the financial markets, which have taken a decidedly more negative tone,” he said. “The government shutdown is partial, and the economic impact is quite limited. But it just adds to this anxiety, to the feeling that the wheels are coming off the cart in Washington.”
Feinman isn’t confident that the Trump administration will help soothe investors anytime soon.
“I just don’t see it getting better,” he said. “The fundamental character of this administration is this is the way it is.”
Times staff writer Don Lee contributed this report.
(2/2) especially in light of my major trade negotiations which are ongoing, but I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.”— Steven Mnuchin (@stevenmnuchin1) December 22, 2018