WASHINGTON — An attempt by Treasury Secretary Steven T. Mnuchin to calm plunging financial markets backfired Monday, further rattling investors with new fears about whether major banks have enough cash in addition to fears they already had about rising interest rates, political dysfunction and a slowing global economy.
Adding to the volatile mix was a fresh attack Monday on the Federal Reserve by President Donald Trump, who declared the central bank was the U.S. economy’s “only problem” and that it didn’t “have a feel for the market.”
“The Fed is like a powerful golfer who can’t score because he has no touch he can’t putt!” Trump said on Twitter.
Monday’s was the worst Christmas Eve performance on record for the benchmark Standard & Poor’s 500 index, according to data compiled by Bloomberg.
The S & P 500 fell 2.7 percent in preholiday trading, digging deeper into the red. The Dow Jones industrial average fell 653.17 points, or 2.9 percent, to 21,792.20. The Nasdaq declined 140 points, about 2.2 percent on the day.
The stock market was open only a half-day Monday. It’s typically a sleepy day with little trading. But not this time. The world watched as America’s long bull run that began in March 2009 almost came to an official end.
This month has been the worst December for stocks since 1931.
As a partial federal government shutdown entered its third day, two top Democrats blamed Trump for “plunging the country into chaos.”
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“The stock market is tanking and the president is waging a personal war on the Federal Reserve after he just fired the Secretary of Defense,” said a statement from House Democratic leader Nancy Pelosi and Senate Democratic leader Charles Schumer.
One of the triggers for a sell-off starting last week was a decision by the Federal Reserve to inch up its key interest rate. It was the fourth small hike this year, bringing the short-term federal funds rate used as a benchmark for credit cards, auto loans and other consumer lending to a still low range of 2.25 to 2.5 percent.
Fed Chairman Jerome H. Powell and other officials signaled they expect to raise interest rates more slowly next year as U.S. economic growth is projected to decelerate to a still-solid pace.
On Sunday, Mnuchin issued a surprising statement saying he had personally called the chief executives of the nation’s six largest banks and that they “confirmed that they have ample liquidity available for lending to consumer, business markets, and all other market operations.”
Despite the stock market’s steep declines, there had been no concerns until then about whether banks had enough cash. Mnuchin’s statement now sent up red flags.
“From all indications, Secretary Mnuchin was attempting to ease market concerns but very well did the exact opposite,” said Andrew Kositkun, foreign exchange analyst at City National Bank in Los Angeles.
“While the stock market has sold off sharply, there wasn’t really any concerns about liquidity,” he said. “However, the markets are very much on edge, leaving some wondering if there is something Mnuchin knows that the markets don’t, especially given that the easier way to check on liquidity would be to call (Fed Chairman) Jay Powell.”
A lack of liquidity at banks would be similar to what happened in fall 2008, when the collapse of the housing market and securities backed by toxic mortgages led to bank failures and nearly caused a meltdown of the financial system. Federal Reserve officials stepped in to provide emergency lending and Congress authorized $700 billion to bail out banks.
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“There’s a big difference between a bear market and an illiquid market,” said Kathy Bostjancic, head U.S. financial market economist at consulting firm Oxford Economics. “When you have an illiquid situation, that ignites outright panic, forced selling and much worse. It can make the bear market much steeper, like a bank run. You’ve ignited panic in investors’ minds.”
Another key concern among investors came from reports over the weekend that Trump had discussed whether he could fire Powell. Trump has leveled unprecedented public criticism at Powell for interest rate hikes, even though the nation’s economy has been growing strongly.
Trump handpicked Powell to be chairman of the Fed, which operates independently and is supposed to ignore political concerns and make monetary policy based on what’s best for the U.S. economy.
Powell’s term as a Fed governor does not expire until 2028, and his four-year term as chairman lasts until February 2022.
The volatility in Washington is coming amid the backdrop of what appears to be a very strong economy — the best in more than a decade.
Despite the stock sell-off, growth is likely to hit 3 percent this year, the best since 2006. The job market is the strongest since at least 2000 and unemployment is at the lowest in nearly 50 years.
The Los Angeles Times and the Washington Post contributed.