Slowing global growth may lessen the threat of rising rates

  • By Peter Eavis,
  • The New York Times News Service
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One of the biggest threats to stock prices is suddenly looking less scary.

Investors' concerns about rising interest rates have helped fuel the recent selling that has left the S&P 500 stock index (.SPX) nearly 6.6 percent off its high. But there have been signs in recent days that interest rates may not rise as quickly as investors previously expected.

Officials at the Federal Reserve, which sets interest rates, made remarks last week that suggested they were becoming more mindful of a slowing global economy.

While that may mean stock investors will soon be able to worry less about rising rates, the slowdown in growth could still weigh on stock prices.

Central bank policymakers tend to hold off on raising interest rates if they believe the economy is decelerating. Higher rates push up borrowing costs for companies and consumers. That, in turn, may prompt them to spend less, which can weaken the economy.

Rising rates can hurt stock prices in another way. They make the returns from bonds more attractive compared with stocks. That may cause investors to shift some of their money to bonds from stocks.

The Fed has pressed ahead with rate increases as the economy has strengthened this year. Already, it has raised its main policy rate three times and is expected to do so again next month. President Trump has repeatedly complained this year about the Fed's decision to keep raising rates.

But the case for steadily higher rates may be weakening.

The growth of several big economies has slowed recently. Germany's gross domestic product unexpectedly shrank in the third quarter. And American growth is expected to cool next year as the effect of the tax cuts enacted last year wears off.

The bond markets are signaling increasing concerns about global economic growth. After hitting 3.24 percent earlier this month — a move that underscored investors' belief that rates were on their way up — the yield on the 10-year Treasury note fell last week to close at 3.07 percent on Friday.

A shift is also occurring in the market that investors use to bet on the Fed's future interest rate decisions. A majority of investors no longer expect the central bank to raise rates twice between now and when policymakers meet in March. A week ago, investors were forecasting a 54 percent chance of two increases.

While the tone of Fed officials may also have softened a bit, they have not said they will hold off on interest rate increases. The gentler tone is apparent in comments about growth. When asked last week what headwinds the economy faces, Jerome H. Powell, the chairman of the Federal Reserve, mentioned slowing global growth, calling that "a real thing." He also listed the waning effect of the United States' tax cuts and the Fed's own interest rate increases.

"These are things we are well aware of, though," Mr. Powell said. "We know that when we're making policy, and we think about those, and kind of have a sense of what they might be."

On Friday, the Fed's vice chairman, Richard H. Clarida, noted that slowing abroad could affect the United States' economy. "It impacts big parts of the economy through trade and through capital markets and the like," he said in an interview with CNBC.

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