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The sudden shift that should have all of us worried about the global economy

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The markets’ responses to the latest US Federal Reserve Board’s interest rate and balance sheet decisions were telling. The immediate reaction of the share market was to mark stocks up, before a more considered assessment sent them back down. Bond rates eased and the US dollar slid against its major trading partners’ currencies.

The Fed announcement should have Trump concerned about his re-election prospects.Credit:AP

The nature of the Fed’s announcements – a majority of the members of its Open Market Committee expect no rate increases this year and the Fed plans to end the shrinking of its balance sheet by the start of October – ought to have been positive for the stock market. Instead the Dow Jones index ended more than half a percentage point down.

It was only six months ago that a signalling by the Fed of three rate rises in 2019 and a more aggressive winding down of a balance sheet still swollen by the central bank’s response to the financial crisis helped spark a dramatic plunge in stocks.

That sell-off, and the effects of the Trump administration’s trade policies on both financial markets and the US economy, has had a profound effect on the Fed, whose officials made a quite abrupt transition from hawks to doves at their January meeting. They’re even more dovish now.

There is a fundamental reason why what might previously have been regarded as........

© Canberra Times