The US markets closed lower on Friday, as weakness in technology and consumer staples shares offset the latest batch of corporate earnings, which largely continued to beat expectations. The selling pressure intensified as the yield on the 10-year Treasury note hit a more-than-four-year high. The main benchmarks still posted modest weekly gains, however. San Francisco Fed President John Williams said that continued gradual rate increases are the right forecast for the Federal Reserve for the next couple years amid stronger US and global economic growth, fiscal stimulus, a strong labor market, better wage growth and stable inflation. Williams added that he is not very concerned about the flat yield curve that some investors worry is an early signal of a coming economic slowdown. The yield curve will likely steepen as the Fed trims its balance sheet and as the federal government issues more debt to fund fiscal stimulus.
Meanwhile, Chicago Federal Reserve Bank President Charles Evans said the narrow gap between long-term and short-term borrowing costs, sometimes seen as a warning of a slowdown ahead, is not a matter of particular concern to him. Evans added that removing monetary policy accommodation is a natural response to fiscal stimulus and the strength of the international economy, though it may also be the yield curve will be flatter in the future than it has been historically. Separately, Federal Reserve Governor Lael Brainard said the US economy appears capable of handling further interest-rate increases in the near future. My anticipation is that the outlook is for continued, solid growth. The outlook looks consistent to me for continued gradual increases in the federal funds rate.
The Dow Jones Industrial Average lost 201.95 points or 0.82 percent to 24,462.94, the Nasdaq dropped 91.93 points or 1.27 percent to 7,146.13, and the S&P 500 was down by 22.99 points or 0.85 percent to 2,670.14.