US financial markets are expected to begin trading on a downswing on Monday as traders react to a pro-fiscal policy outlook that led the Federal Reserve to keep interest rates at the historically low levels of 1.5% for at least another year.
Major central banks around the world have been pumping billions of dollars into the financial system since the global financial crisis in 2008, flooding the markets with money with little promise of more to come.
But the FOMC — made up of Chairman Jerome Powell and his colleagues — hiked rates at the meeting this month to a nine-year high despite lower-than-expected inflation in the US in September.
The stock market has been climbing as traders expect the economy to pick up and the economy is likely to get more accommodating policies from central banks to reverse the drying up of liquidity.
At the close of Friday’s close of equity trading in London, the FTSE 100 index was down 0.8%, while in Paris, the CAC 40 index was down 0.4%. In Frankfurt, the DAX index was down 0.4%.
On Wall Street, futures were down as much as 300 points earlier, following the close of trading at London’s close, while the Dow Jones Industrial Average was down almost 360 points at 20,979, and at 6,880 in Tokyo it was also down by more than 300 points.
A surprise drop in consumer prices in the US as well as a revision to the US Treasury’s issuance projections helped the dollar reverse losses. It climbed around the average of the past eight days to hit a four-week high of 111.84 against the yen, but later eased back to 108.65.
In his prepared testimony to Congress on Friday, the Fed’s chief said that conditions in the US economy “are likely to warrant keeping the federal funds rate at the current low level for some time”.
But he also cautioned the central bank that “robust economic growth and inflation are unlikely to sustain” the Fed’s pledge to keep rates steady for the next three years.