By Pam Martens and Russ Martens: December 19, 2024 ~
Fed Chair Jerome Powell
If President-elect Donald Trump thought Fed Chair Jay Powell was going to be taking a loyalty oath to him, Trump got a rude awakening yesterday.
The Fed cut interest rates by a quarter point yesterday but issued a statement suggesting that rate-cutting would be far more subdued next year than the market had expected.
In response, the Dow Jones Industrial Average fell 1123 points, closing near its lows of the day and marking its 10th consecutive day of losses. The Dow gave up 2.58 percent of its value while the tech-heavy Nasdaq lost 3.56 percent.
The megabanks on Wall Street were among the big losers of the day. Morgan Stanley dropped 5.25 percent; Goldman Sachs was down by 4.25 percent; Citigroup gave up 4.22 percent; Bank of America lost 3.44 percent while JPMorgan Chase shed 3.35 percent by the closing bell.
These five megabanks are the banks most heavily exposed to tens of trillions of dollars in derivatives. What the Fed does with interest rates has a major impact on their existing derivative trading positions. The broad selloff in these names suggests these banks have some wrong-way bets in their derivative books, or at least that is the market’s perception.
In his first term as President, Trump pressured Powell for lower interest rates and was heavily focused on the stock markets’ performance – appearing to see it as a gauge of his own performance as President. The Fed’s suggestion that it will be stingy with more interest rate cuts next year is likely to set up a showdown between Trump and Powell.
During Powell’s press conference yesterday, he also shot down any notion that the Fed was going to be getting involved in Trump’s promise to his crypto megadonors to create a Bitcoin Strategic Reserve. Powell stated: “We’re not allowed to own bitcoin,” adding that “we are not looking for a law change at the Fed.”
Those remarks sent Bitcoin into a sharp skid in late afternoon, from the range of $105,000 to as low as $99,000 at one point. Bitcoin had recovered to a $102,000 level as of 8:00 a.m. ET this morning.
At the Nashville Bitcoin Conference in July, Trump was a featured speaker and told the crowd this:
“It will be the policy of my administration to keep 100 percent of all Bitcoin the US government currently holds [seized from fraudulent actors] or acquires in the future…as a core of the strategic national Bitcoin stockpile.”
Adding to market jitters yesterday was the unelected tech billionaire Elon Musk appearing to be muscling his way into the role of the legislative branch of the federal government. In the early hours of the morning yesterday, and continuing through much of the day, Musk Tweeted his displeasure with the proposed Continuing Resolution (CR) to fund the government through mid-March of next year. The CR had the support of Republican House Speaker Mike Johnson and was expected to pass.
At 3:14 p.m. – in the midst of the stock market meltdown – Musk Tweeted:
“ ‘Shutting down’ the government (which doesn’t actually shut down critical functions btw) is infinitely better than passing a horrible bill”
Musk does not appear to be conversant with the reality that credit rating agencies like S&P, Moody’s and Fitch don’t take kindly to chaotic governments and might decide to slash the credit rating of U.S. sovereign debt. That would raise the cost to every American taxpayer to finance the nation’s debt.
In 2011, S&P slashed the U.S. sovereign debt rating from AAA to AA+, citing political standoffs between the two major political parties over the debt ceiling.
On August 1 of last year, Fitch downgraded the U.S. Long-Term Foreign-Currency Issuer Default Rating from AAA to AA+. Fitch specifically cited “repeated debt limit standoffs and last-minute resolutions” in explaining the downgrade.
By late afternoon, Trump and Vice President-elect JD Vance were siding with Musk.
If there is no Continuing Resolution passed by Friday night, the government will be forced to go into partial shutdown, which could include employee layoffs.
