The Federal Reserve has pledged to bring inflation back under control — even if a slowing economy drives up unemployment and households and businesses feel some pain. Despite the Fed’s move to Interest rate hike this week Widely expected, the stock markets are already feeling this pain.
“The Fed’s ongoing work to balance restoring price stability against economic pain has roiled markets as hopes are fading fast,” said Nicole Tannenbaum, partner and chief investment analyst at Checkers Financial Management. “Monetary policy is a blunt tool, and investors are rightly concerned that the Fed may go too far too quickly before it can accurately assess the effects of its policy on the economy.”
Bad market news — and the Federal Reserve’s forecast of a sharp slowdown in the economy — could affect campaigns this fall in the midterm congressional elections, where Republicans hoped voters would blame President Biden and Democrats for high inflation. Inflation has become somewhat lower A prominent issue among voters, as people say feeling better About the economy and get some breathing thanks to lower gas prices. But turmoil in the markets could become a hot topic on the trail.
The full weight of the Fed’s actions since March – pushing the key rate by three percentage points already, with more increases to come – It may not be felt until later this year or next. But financial markets take the central bank’s promises and send the alarms back, making it clear that no matter how many times Fed officials say they will do everything they can to squash inflation, the idea still sours Wall Street.
“I think it’s probably going to get worse before it gets better,” said Dan Ives, managing director and chief equity research analyst at Wedbush Securities.
Analysts say the drop is not just about the Fed’s moves so far, but also about more tightening ahead and the growing possibility that the Fed cannot bring down inflation without causing a recession. This type of deflation can quickly rebound into corporate profits, too.
Fed Chair Jerome H. Powell said Wednesday, after the Fed rate announcement.
The central bank is quick to cool the economy and lower consumer prices. Officials aren’t seeing enough progress yet. But market tension is already reflecting the local and global economy I tended to slow down.
Oil prices fell to their lowest level since January. Standard & Poor’s energy sector closed 6.75 percent lower.
Participate in Big tech companies including Apple, Amazon, Microsoft and Meta Platforms all fell on Friday. (Amazon founder Jeff Bezos owns The Washington Post.) Goldman Sachs lowered its year-end forecast for the S&P 500, driven largely by higher interest rates. On the flip side, bond yields soared this week after the Fed’s latest rate hike, and 2-year and 10-year Treasuries posted highs not seen in more than a decade.
The major market indices have fallen significantly over the year so far, although the long bull market that has lasted until recently means they are still up more than 30 percent over the past five years.
Bad economic news can become a political issue. House Minority Leader Kevin McCarthy (California), Announcing the official campaign agenda of the Republican Party On Friday, he touched on the topic: “We want a strong economy. That means you can fill up your tank. You can buy groceries. You have enough money left to go to Disneyland and save for the future – so that their paychecks grow, they no longer shrink.”
brutal close to Came a week later The Federal Reserve raised interest rates again by three-quarters of a percentage point, the third step of its kind and the fifth hike this year in its fight against inflation. Wednesday’s surge was considered oddly large until recently. But Fed officials want to push interest rates beyond the “neutral” zone of about 2.5 percent, where rates are neither slowing nor stimulating the economy, and into the “restrictive zone” that dampens consumer demand.
The Fed’s benchmark interest rate is now between 3 percent and 3.25 percent, and officials expect it to exceed 4 percent by the end of the year, to what is considered captive.
This rate does not directly control the rates for mortgages and other loans. But it does affect how much banks and other financial institutions pay to borrow, which helps drive loan pricing more broadly. More importantly, Fed communications – whether it’s notes from Fed officials or policy makers’ economic forecasts – are key to shaping financial conditions and getting markets to start pricing rate increases that are yet to come.
Monetary policy is notorious for lagging, and the Fed’s rate increases have yet to significantly lower inflation so far. But the moves appear in the economy in other ways.
“Financial conditions have usually been affected well before we actually announce our decisions,” Powell said this week. Then changes in financial conditions begin to affect economic activity very quickly, within a few months. But it will likely take some time to see the full effects of changing financial conditions on inflation.”
KPMG chief economist Diane Sonk said traders are also concerned about how the Fed’s moves will be amplified as other central banks ramp up their fights against inflation. The Fed was among the list of global central banks raising interest rates this week — the Bank of England raised rates by half a percentage point Thursday, for example, and warned that Britain may already be in a recession. The fear is that the economies of many countries will not be able to withstand a severe slowdown. And the Fed’s higher interest rates mean greater debt burdens for poor countries.
European shares also fell sharply on Friday, in part after Britain announced a sweeping series of tax cuts to ease the recession.
Economists and traders fear that if policymakers are taking large swings at once, they risk exaggerating it, not only for their own economies but for the world.
“Concurrent, not synchronous,” Sonk said of the successive moves by the various central banks. “This was not planned.”