The Fed sees economic pain ahead. Stock markets feel it now.
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. And while the Fed’s move to raise interest rates this week was widely expected, stock markets are already feeling that pain.
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.
The full weight of the Fed’s actions since March – pushing the key rate by 3 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 worries 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 decline 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.
Fed Chair Jerome H. Powell said Wednesday, after the Fed rate announcement.
Big increases in interest rates are the new normal for the Federal Reserve
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 also fell more than 6 percent.
Participate in Big tech companies including Apple, Amazon, Microsoft and Meta Platforms all fell on Friday. (Amazon President 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.
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.
Why does the Federal Reserve raise interest rates?
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, the Fed’s communications — whether it’s notes from Fed officials or the economic outlook for policy makers — are key to shaping financial conditions, and getting markets to start pricing in rate hikes 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.”
Five graphs that explain why inflation is soaring
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 Federal Reserve was among the list of global central banks that raised interest rates this week – the Bank of England raised rates by half a percentage point on Thursday, for example, and warned that the UK could 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.
Economists and traders fear that if policymakers are taking so much swings at once, they risk exaggerating it, not just for their own economies, but for the world.
“Synchronous, not synchronous,” Sonk said of the successive moves by the various central banks. “This was not planned.”