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

Blue-chip stocks fell to their lowest level since 2020 on Friday, continuing a bad recession that began in August as investors try to grapple with economic head winds in the United States and around the world that are only expected to get worse. Chances are.

Major stock indices ended the week with losses, limiting their fifth decline in the past six weeks. The Dow Jones Industrial Average fell 483 points, or 1.6 percent, at Friday’s close and fell below the 30,000 mark. The index avoided closing in bear market territory with a fall of 20 per cent from its previous high. The S&P 500 lost 1.7 percent and the Nasdaq Composite lost 1.8 percent.

The Federal Reserve has promised to get inflation back under control – even if slowing the economy means unemployment rises and homes and businesses feel some pain. And although the Fed’s move raise interest rates this week As was widely expected, the stock markets are already feeling that pain.

“The Fed’s continued balancing act between restoring price stability in lieu of economic pain has shaken markets as hopes for a soft landing are rapidly fading,” said Nicole Tannbaum, partner and chief investment strategist at Checkers Financial Management. “Monetary policy is a blunt instrument, and investors are rightly concerned that it may go too soon before the Fed is able to accurately assess the effects of its policy on the economy.”

Bad market news – and the Fed’s forecast of an increasingly slowing economy – could also stymie campaigns in Congress for this fall’s midterm elections, where Republicans are hoping voters will blame President Biden and Democrats for high inflation. Inflation has come down a bit Major issues among voters, as people say they Seems good About the economy and to get some relief from falling gas prices. But the volatility in the markets could become a hot topic on the trail.

The full weight of the Fed’s actions since March – raising a key interest rate already by 3 percentage points, with more growth still to come – May not be realized until the end of this year or until next year. But financial markets are heeding the central bank’s promise and sending back the alarm – explaining how often Fed officials say the idea of ​​doing whatever they can to crush inflation is still on the Wall. Turns the street.

“I believe 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 fall is not only about the Fed’s moves so far, but also about further tightening, and there is a growing possibility that the Fed may not reduce inflation without a recession. Such a slowdown can also have an impact on corporate profits.

“The soft landing will be very challenging, and we don’t know — no one knows — whether this process will lead to a recession or, if so, how significant the recession will be,” Fed Chair Jerome H. Powell said Wednesday. Fed rate announcement.

Supersized rate hike is the Fed’s new normal

The central bank is rushing to cool the economy and lower consumer prices. The authorities are yet to see enough progress. But market panic is already reflecting the domestic and global economy. Heading towards recession.

Oil prices have fallen to their lowest level since January. The S&P energy sector closed down 6.75 percent.

in shares Big tech firms including Apple, Amazon, Microsoft and Meta Platforms fell on Friday. (Amazon President Jeff Bezos owns The Washington Post.) Goldman Sachs cut its year-end S&P 500 forecast, driven largely by interest rate hikes. On the other hand, bond yields rose this week after the Fed’s latest rate hike, and 2-year and 10-year Treasury rates ignored for more than a decade.

Major market indices are down significantly for the year so far, although a prolonged bull market 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 (R-California.), GOP official campaign agenda announced On Friday, the subject touched upon: “We want an economy that is strong. This means you can fill your tank. You can buy groceries. You have enough money left over to go to Disneyland and save for the future – so that while paychecks increase, they no longer shrink. ,

close to cruel came after a week The Fed once again raised rates by three-quarters of a percent, the third such move and the fifth hike of the year in its fight against inflation. Wednesday’s growth was considered externally large until recently. But Fed officials want to push rates beyond a “neutral” zone of about 2.5 percent, where rates are neither slowing nor juicing the economy, and slashing consumer demand into a “restrictive zone.”

The Fed’s benchmark interest rate now sits between 3 percent and 3.25 percent, and officials expect it to surpass 4 percent by the end of the year, which is considered restrictive.

Why does the Fed raise interest rates?

That rate does not directly control rates for mortgages and other loans. But it affects how much banks and other financial institutions pay to borrow, which helps drive loan pricing more broadly. And crucially, the Fed’s own communications – whether it is commentary on economic projections from Fed officials or policymakers – are critical to shaping financial conditions, and allowing the market to begin pricing in rate hikes that still remain unaffordable. are about to come.

Monetary policy famously operates with a lag, and the Fed’s rate hikes have yet to significantly reduce inflation. But the move in the economy is showing in other ways.

“The financial situation has generally been impacted well before we announced our decisions,” Powell said this week. “Then changes in financial conditions begin to affect economic activity quite rapidly within a few months. But it is likely to take some time to see the full effects of changing financial conditions on inflation.”

Five charts explaining why inflation is so high

KPMG chief economist Diane Swonk said traders are also worried about how the Fed’s moves will be extended as other central banks also intensify their fight against inflation. The Fed was one of a slate of global central banks to raise rates this week – for example, the Bank of England raised its rate by half a percentage point on Thursday, warning that the United Kingdom may already be in recession. Is. The fear is that the economies of many countries will not be able to cope with extreme recessions. A hike in the Fed’s rates also means a bigger debt burden on poor countries.

European stocks also fell sharply on Friday, when the United Kingdom announced a broad range of tax cuts to cushion against the recession.

Economists and businessmen fear that by making big changes all at once, they risk overdoing it, not only for their own economies, but for the world as well.

“Synchronized, not synchronized,” Swonk said of the back-to-back moves of various central banks. “It wasn’t planned.”

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