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Vocal minority of investors echo Trump's concerns over Fed fiscal tightening

Invesment analysts and bankers are questioning the rationale for hikes

New York

US President Donald Trump isn't alone in fretting about the effect of the Federal Reserve's interest-rate hikes on the economy and the markets. A small but growing chorus of investors has been becoming more vocal recently in warning that a policy error is under way.

News that Mr Trump has raised the idea of firing Fed Chairman Jerome Powell could add to turmoil in markets, which have already been shaken up by the central bank's projection of continued rate hikes and a commitment to maintain an "automatic pilot" approach to shrinking its balance sheet.

"If the stock market continues down like it has the last few days, Mr Trump might have to get in line given the number of people who want to fire him," said Jim Bianco, president of Bianco Research LLC in Chicago.

Fears that the Fed risks stifling growth just as the economy faces other headwinds have been on full display recently, with stocks selling off and the Treasury yield curve flattening further.

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The S&P 500 tumbled more than 7 per cent last week and the Nasdaq Composite Index became the biggest US equity gauge to enter a bear market since the financial crisis.

Perhaps, the notion of a policy error is nowhere more clearly expressed than in the US bond market. Treasuries rallied after the Fed raised rates for the fourth time this year on Dec 19, with the 10-year Treasury yield slipping below 2.75 per cent for the first time since April.

The spread between two-year and 10-year Treasury yields narrowed to a level unseen since 2007, bringing even closer the prospect of an inversion that many consider a harbinger of recession.

And although the median projection of Fed officials is for two quarter-point hikes in 2019, Fed funds futures are now far from pricing in even one increase.

While Mr Trump's public attacks on Mr Powell could further roil the market - and any attempt to remove him from his post would be seen by investors as far more dangerous than any perceived policy mistake - views that the Fed may have gone too far in raising borrowing costs are gathering momentum.

Here's a collection of those of who have been sounding the alarm on Fed policy beyond Mr Trump:

* Priya Misra, head of global rates strategy at TD Securities LLC in New York: "I think it's a notion of a Fed policy mistake. The Fed is signalling continued hikes, which is a mistake. The market was already worried about that. Unfortunately, the Fed didn't alleviate many of those fears."

* Scott Minerd, chief investment officer at Guggenheim Partners: "As the curve keeps flattening on us, it's telling us that monetary policy is being too restrictive and that we don't have enough reserves in the system to stimulate the economy."

* Donald Selkin, chief market strategist at Newbridge Securities, in an interview earlier this week: "The issue is whether the Fed is providing tough love to the market. He's saying everything is great, the economy is doing great, but the market, which is forward-looking, is dropping. Something's not right.

The Fed has made many policy mistakes in the past. I guess when the fourth quarter earnings come out, whether there's lower guidance, that's what everyone will look for."

* David Bianco, chief investment officer at Deutsche Asset Management, in a note to clients: "The Fed must make the right decision for the economy, not its credibility or autonomy. The ability to raise interest rates is an awesome power and no hike should be made without careful consideration of the risks to growth, wealth and the jobs at stake. This new Fed Chair and committee must stop treating higher rates as no big deal and more clearly answer these questions to regain market confidence: What are the benefits of further hikes? What are the risks? Which inflation indicator gives you the most concern?"

* Gene Tannuzzo, deputy global head of fixed income for Columbia Threadneedle Investments: "I think they've done a bit of a disservice by trying to minimise the impact of the balance sheet that's going on in the background."

* Jim Bianco, president of Bianco Research LLC in Chicago: "The Fed sees the market is solidly screaming at them "Wrong policy!" and they are trying to understand that. Not Mr Trump. And if they do not get the messaging to the markets right, stocks could go down further and Wall Street will turn on Mr Powell."

* Michael Churchill, research analyst at Churchill Research: The Fed is "probably at peak error right now," he wrote in a note. "The Fed's intellectual and policy posture is so bad now that it can probably only get better. The Fed's errors are easy to demonstrate, which makes it likely they will be rectified sooner rather than later." BLOOMBERG

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