Business

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

Stock markets fell Friday, continuing a bad slump that began in August as investors try to grapple with economic headwinds in the United States and around the world that are likely to worsen.

Major stock indices ended the week with losses, capping their fifth decline in the past six weeks. The Dow Jones industrial average fell 483 points, or 1.6 percent, near Friday’s close, falling below 30,000. The index narrowly avoided closing bear market territory, down 20 percent from its previous high. The S&P 500 fell 1.7 percent and the Nasdaq Composite 1.8 percent.

The Dow fell to levels not seen in trading since 2020 before recovering slightly by late afternoon.

The Federal Reserve has promised to bring inflation back under control, even if slowing the economy means unemployment rises and households and businesses feel some pain. And while the Fed’s move to hike rates this week was widely anticipated, equity markets are already feeling the pain.

“The Fed’s ongoing balancing act between restoring price stability in return for economic pain has shaken markets as hopes for a soft landing are quickly fading,” said Nicole Tanenbaum, partner and chief investment strategist at Checkers Financial Management. “Monetary policy is a blunt instrument and investors are rightly concerned that the Fed may be moving too far too quickly before it is able to accurately estimate the effects of its policies on the economy.”

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The bad market news — and the Fed’s forecast of a sharply slowing economy — could also affect campaigns for this fall’s midterm elections in Congress, where Republicans hope voters will blame President Biden and Democrats. will reflect high inflation. Inflation has become a slightly less noticeable issue among voters, as people say they feel better about the economy and are getting some breathing room from falling gas prices. But turmoil in the markets can become a hot topic on the track.

The full weight of the Fed’s actions since March — a key rate already pushed up 3 percentage points, and more hikes to come — may not be felt until later this year or next year. But the financial markets are taking the central bank’s promise and again sending out alarms – making it clear that no matter how many times Fed officials say they will do everything they can to crush inflation, Wall Street remains the idea. to cherish.

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

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Analysts say the decline is not only related to the Fed’s actions so far, but also to further tightening in the future and the increasing likelihood that the Fed will not be able to cut inflation without triggering a recession. Such a downturn can also quickly spill over into corporate earnings.

“A soft landing would be quite challenging, and we don’t know — nobody knows — whether this process will lead to a recession and, if so, how big that recession would be,” Fed Chair Jerome H. Powell said Wednesday. after the Fed’s interest rate announcement.

Superb rate hikes are the Fed’s new norm

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

The oil price fell to its lowest level since January. S&P’s energy sector closed 6.75 percent lower.

Shares in major tech companies, including Apple, Amazon, Microsoft and Meta Platforms, fell Friday. (Amazon chairman Jeff Bezos owns The Washington Post.) Goldman Sachs lowered its forecast for the S&P 500 before the end of the year, largely driven by rising interest rates. On the other hand, bond yields rose this week following the Fed’s latest rate hike, and 2-year and 10-year Treasury yields reached unprecedented highs for more than a decade.

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Major market indices have fallen significantly for the year so far, although the long bull market that lasted until recently means they are still up more than 30 percent in the past five years.

Bad economic news can become a political problem. Minority group leader, Kevin McCarthy (R-Calif.), announcement of the official GOP campaign agenda on Friday on the subject: “We want an economy that is strong. That means you can fill your tank. You can buy the groceries. You have enough money left over to go to Disneyland and save for a future – that paychecks grow, they no longer shrink.”

The brute close to the week came after the Fed raised rates again by three-quarters of a percentage point, its third such step and fifth hike of the year in its fight against inflation. Wednesday’s rise would be considered bizarrely large until recently. But Fed officials want to push rates beyond the “neutral” zone of about 2.5 percent, where rates don’t slow or weaken the economy, and into “restrictive territory” that dampens consumer demand.

The Fed’s benchmark rate is now between 3 percent and 3.25 percent, and officials expect it to cross 4 percent by the end of the year, well into what is considered restrictive.

Why is the Fed raising interest rates?

That rate has no direct influence on the rates for mortgages and other loans. But it influences how much banks and other financial institutions pay to lend, which drives loan pricing more broadly. And crucially, the Fed’s own communications — whether it be comments from Fed officials or economic projections from policymakers — are critical to shaping financial conditions and driving markets to price in rate hikes that have yet to come.

Monetary policy is known to work with a lag and the Fed’s rate hikes so far have not resulted in significantly lower inflation. But the moves appear in the economy in other ways.

“Financial conditions are usually affected long before we actually announce our decisions,” Powell said this week. “Then changes in financial conditions start to affect economic activity quite quickly, within a few months. But it will probably take some time to see the full effects 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 actions will be magnified as other central banks step up their fight against inflation. The Fed was among a list of global central banks to hike rates this week – for example, the Bank of England raised its rates by half a percentage point on Thursday and warned that the UK may already be in recession. The fear is that many countries’ economies will not be able to withstand an extreme slowdown. The Fed’s rate hikes also mean a greater debt burden for poor countries.

European equities also fell sharply on Friday, in part after the United Kingdom announced a sweeping series of tax cuts to cushion a recession.

Economists and traders fear that if policymakers go through wide swings all at once, they risk exaggerating, not just for their own economies, but for the world.

“Synchronous, not synchronized,” Swonk said of the back-to-back movements of several central banks. “This was not planned.”

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