It was a day of free fall for US stocks on Friday after US President Donald Trump announced his new nominee’s name for the Federal Reserve chair role after current chair, Jerome Powell, leaves office in May.
As investors tried to figure out what Trump’s endorsed nominee will mean for interest rates, the dollar swing both ways, as did precious metals gold and silver, crashing massively in over a year.
The S&P 500 was down 0.4 per cent after sinking as much as 1.1 per cent earlier in the day. The Dow Jones Industrial Average dropped 179 points, or 0.4 per cent, and the Nasdaq composite lost 0.9 per cent.
On Wall Street, stocks of metals miners tumbled as the price of gold dropped 11.4 per cent to settle at USD 4,745.10 per ounce. After nearly doubling over 12 months, having topped USD 5,000 for the first time on Monday and was around USD 5,600 at one point on Thursday, it plunged. Silver, which had been on a similar, jaw-dropping tear, fell even more, declining 31.4 per cent.
Prices for gold and other precious metals had been surging as investors looked for safer places to park their money in while weighing risks including a potentially less independent Fed, a US stock market that critics say is expensive, threats of tariffs and heavy debt loads for governments worldwide.
The person leading the US central bank has a tremendous influence on the economy and markets worldwide. Since the Fed tries to keep the US job market humming without letting inflation get out of control, it weighs on investment decisions the world over.
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A fear in financial markets has been that the Fed will lose some of its independence if Trump brings in his nominee, Kevin Warsh. That fear in turn helped catapult the price of gold and weaken the US dollar’s value over the last year.
Trump has been pushing for lower interest rates, which usually help goose the economy but can also cause higher inflation. To get inflation down to the Fed’s goal of 2 per cent, for example, may require the unpopular choice to keep interest rates high and grind down on the economy for a while.
Warsh’s nomination, which still requires approval from the Senate, is being seen as both an encouraging signal as well as reason to be uncertain. Warsh used to be a governor on the Fed’s board, so investors are familiar with him, and he too is familiar with and hopes to continue the institution of the Fed as an independent operator.
However, he criticised the central bank’s buying of bonds to keep interest rates low. He has also recently been critical of the Fed’s current chair, Powell, and has voiced support for lower rates.
“Indeed, Warsh is not the Fed’s guy, he is Trump’s guy, and has shadowed Trump on monetary policy almost every step of the way since 2009,” according to Thierry Wizman, a strategist at Macquarie Group. “This doesn’t necessarily mean that Warsh will push the Fed into rate cuts soon,” but it could indicate he may be quicker to do so when the time comes.
Friday’s drops for metals prices helped send the stock of miner Newmont down 11.5 per cent. Freeport-McMoRan, another miner, dropped 7.5 per cent.
The market’s losses were limited by Tesla’s 3.3 per cent gain since it bounced back after dropping on Thursday despite delivering better profit reports for the latest quarter than analysts expected.
Apple added 0.5 per cent after the iPhone maker reported a stronger profit for the latest quarter than analysts expected.
In the bond market, the yield on the 10-year Treasury inched up to 4.25 per cent from 4.24 per cent late Thursday. It got near 4.28 per cent in the overnight and early-morning hours before falling back. A rise in a bond’s yield indicates that its price is weakening.
In stock markets abroad, indexes rose in much of Europe following a mixed performance in Asia. Stocks rose 1.2 per cent in Jakarta after the CEO of Indonesia’s stock market resigned Friday.
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