The US central bank sent a strong signal on Friday that it would be willing to reconsider expected interest rate hikes amid new data showing President Donald Trump's multi-front trade wars are dragging on the economy and shaking up investors.
The message, from the senior Federal Reserve official with the closest links to US financial markets, sent the Dow Jones Industrial Average surging 300 points. But the index later turned negative once again, and closed with yet another steep decline, its worst week in 10 years.
"I think we are hearing something important for markets and that is a concern around risks to the economy and potential slowdown," New York Federal Reserve Bank President John Williams said Friday on CNBC.
He stressed that the Fed is listening to the fears about the risks and will "be ready to reassess and re-evaluate our views and our policy stance."
It was a remarkable comment coming just two days after the Fed raised the key borrowing rate on Wednesday and signaled it will continue to hike next year, albeit at a slower pace, with only two increases projected.
Economist Chris Low lambasted the Fed's "epic post-meeting communications bungle," and cited the "glaring omission" of the Fed failing to recognize a global manufacturing slowdown, and continuing to believe the labor market is the main factor behind inflation.
The Fed has continued to forecast strong growth, which would support their case for tightening monetary policy, but the expected inflation spurt and rise in wages have not materialized.
New data Friday showed the Fed's preferred inflation index slowed to 1.8 percent in November, below the central bank's target.
"It's hard to imagine anyone would think it's acceptable to signal three rate hikes when inflation is below target," Low said, noting the Fed forecast see two hikes in 2019 and one in 2020.
- Trump effect? -
Williams tried to correct the market impression that two interest rate increases are set in stone for next year, highlighting a slight change of language in the policy statement issued Wednesday.
The Fed's November statement said rate increases were expected, while now it "judges that some further gradual" hikes are in store, which Williams said "is not a commitment or promise in any way."
"Clearly the Fed is changing its tone and it's getting a little more dovish following the market reaction this week," said Adam Sarhan of 50 Park Investments.
"The Fed is blinking."
Of course there were many who criticized the Fed for not raising interest rates fast enough in the past two years.
While the Fed continues to forecast solid growth, new government data released Friday revealed that falling exports and slower consumer spending and business investment are putting the brakes on economic growth in the second half of the year, while inflation is again falling.
US growth in the July-September quarter was slightly slower than previously reported, at 3.4 percent, dragged down by the large drop in exports, the Commerce Department reported.
With hundreds of billions of dollars in goods hit by retaliatory tariffs, US exports fell by the largest amount since early 2009 at the height of the global financial crisis, according to the report, the third and final reading on third quarter GDP.
Trump's aggressive trade policies, and especially the tariff retaliation from China, has impeded exports, with soybean sales nearly grinding to a halt.
The strong US dollar also has made American goods more expensive.
The dispute with China, even with a ceasefire declared until March 1 for negotiations, has created fears of slowing US and global growth, and caused stock markets to retreat, with Wall Street wiping out all of the 2018 gains.
White House trade advisor Peter Navarro helped fuel the Wall Street downturn Friday with more hardline comments about China in an interview with Nikkei, saying Beijing is "trying to steal the future."
He also said two rate hikes by the Fed would be "two too many."
"We don't understand why the Fed is acting so contractionary, at a time when there's no inflation to worry about."
Gregory Daco of Oxford Economics said the data added to "evidence that business investment momentum continues to gradually cool."
Other data show fourth quarter growth is shaping up to be even more sluggish.
Purchases of durable goods -- big ticket items like appliances, vehicles and machinery -- rose in November compared to October, but much less than expected. That follows a big drop in October, and will drag on GDP in the final quarter of 2018.