The Fed sees economic pain ahead. Stock markets are feeling it now.

Stock markets fell to their lowest levels since 2020 on Friday, continuing a severe slump that began in August as investors tried to grapple with economic headwinds in the United States and around the world that are likely only to get worse becomes.

Stock indexes were on course to end the week in losses, capping a fifth decline in the last six weeks. The Dow Jones industrial average fell more than 700 points, or 2.1 percent, on Friday afternoon. and fell below the 30,000 mark. The index appeared to be headed for bear market territory, down 20 percent from its previous high. The S&P 500 slipped more than 2 percent, as did the Nasdaq Composite.

The Federal Reserve has pledged to bring inflation back under control — even if the economic slowdown means unemployment rises and households and businesses feel pain. And while the Fed’s move to raise rates this week was widely expected, stock markets are already feeling the pain.

The bad market news — and the Fed’s forecast of a sharply slowing economy — could also impact campaigns for the midterm congressional elections in the fall, where Republicans have hoped voters will blame President Biden and Democrats for high inflation be held responsible.

The full weight of the Fed’s actions since March – already raising a key interest rate by 3 percentage points, with more hikes still to come – may not be felt until later this year or next. But financial markets are heeding the promise of the central bank and sounding the alarm again — making it clear that no matter how many times Fed officials say they will do whatever it takes to crush inflation, the idea still roils Wall Street.

“I think it’s probably going to get worse before it gets better,” said Dan Ives, managing director and senior equity research analyst at Wedbush Securities.

Analysts say the drop reflects not only the Fed’s moves so far, but further tightening in the future and the growing likelihood that the Fed won’t be able to lower inflation without triggering a recession.

“A soft landing would be very challenging, and we don’t know – nobody knows – if that process will lead to a recession, or if so, how significant that recession would be,” Fed Chairman Jerome H. Powell said Wednesday after the Fed rate announcement.

Outsized rate hikes are the Fed’s new normal

The central bank is rushing to cool the economy and lower consumer prices. Officials don’t see enough progress yet. But market tremors are already reflecting a domestic and global economy headed for a slowdown.

Oil prices fell to their lowest level since January. S&P’s energy sector was also down more than 6 percent.

shares in Big tech companies like Apple, Amazon, Microsoft and Meta Platforms fell on Friday. (Amazon Chairman Jeff Bezos owns the Washington Post.) Goldman Sachs lowered its year-end guidance for the S&P 500, largely due to rising interest rates. On the other hand, bond yields rose this week after the Fed’s latest rate hike, with 2-year and 10-year Treasury rates hitting highs not seen in more than a decade.

Major market indices are down significantly year to date, although the long bull market that lasted until recently means they’re still up more than 30 percent over the past five years.

The brutal proximity to week came after The Fed hiked rates again by three-quarters of a percentage point, its third such move and the fifth hike of the year in its fight against inflation. Wednesday’s surge would have been considered unusually high until recently. But Fed officials want to push rates past the “neutral” zone of about 2.5 percent, where rates are neither slowing nor stimulating the economy, and into a “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, well into what’s considered restrictive.

Why is the Fed raising interest rates?

This rate does not directly control mortgage and other loan rates. But it affects how much banks and other financial institutions pay for loans, which helps affect loan prices more broadly. And, crucially, the Fed’s own communications – whether that be words from Fed officials or economic forecasts from policymakers – are key in shaping financial conditions and leading markets to price in yet to come rate hikes.

Monetary policy is notoriously laggy and the Fed’s rate hikes to date have not resulted in much lower inflation. But the movements show up in the economy in a different way.

“Financial terms were typically impacted well before our decisions were announced,” Powell said this week. “Then changes in financial conditions affect economic activity fairly quickly, within a few months. But it will likely take time to see the full impact of changing financial conditions on inflation.”

Five charts that explain why inflation is so high

Diane Swonk, chief economist at KPMG, said traders are also nervous about how the Fed’s moves will be stepped up even as other central banks step up their fights against inflation. The Fed was among a number of global central banks to hike interest rates this week – the Bank of England, for example, hiked rates by half a percentage point on Thursday and warned the UK may already be in recession. The fear is that the economies of many countries will not be able to withstand an extreme slowdown. The Fed’s rate hikes also mean heavier debt burdens for poor countries.

Economists and traders fear that by making large swings all at once, policymakers risk overdoing it, not just for their own economies but for the world.

“In sync, not in sync,” Swonk said of back-to-back moves by different central banks. “That was not planned.”

Leave a Reply

Your email address will not be published.