Can the Fed tame inflation without further shaking the stock market? What awaits investors?

Can the Fed tame inflation without further shaking the stock market?  What awaits investors?
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The Federal Reserve isn’t trying to criticize the stock market as it rapidly raises interest rates to slow still-reddening inflation — but investors should be prepared for more pain and volatility because they don’t want to upset policymakers. Investors and strategists said with a deepening selloff.

“I don’t think they’re necessarily trying to bring down inflation by destroying stock prices or bond prices, but it has that effect.” Exencial Wealth Advisors Chief Investment Officer Tim Courtney said in an interview.

U.S. stocks fell sharply last week after hopes of a marked cooling in inflation were dashed by inflation. warmer-than-expected August inflation reading. The data fueled expectations of at least a 75 basis point hike among futures traders when the Fed concludes its policy meeting in September. 21, some traders and analysts are looking for an increase of 100 basis points or a full percentage point.

Preview: The Fed is ready to tell us how much “pain” the economy will suffer. It still won’t signal a recession.

Dow Jones Industrial Average

The S&P 500 entered the week down 4.1%

4.8% and the Nasdaq Composite declined

A decrease of 5.5% was recorded. The S&P 500 ended Friday below the 3,900 level in view as an important technical support area, with some chart watchers considering the potential to test the 2022 low of 3,666.77 set for June 16.

To see: As S&P 500 slips below 3,900, stock bears are seen maintaining their dominance

A profit warning from global shipping giant and economic bellwether FedEx Corp.

That added to fears of a recession, which contributed to stock market losses on Friday.

Read: Why is FedEx’s stock drop so bad for the entire stock market?

Treasuries also fell with the yield on the 2-year Treasury note

It rose to a near 15-year high above 3.85% on expectations that the Fed will continue to raise rates in the coming months. As prices fall, productivity rises.

Investors are operating in an environment where the central bank’s need to curb stubborn inflation is widely seen. eliminated the concept of the metaphorical “Fed put”. in the stock market.

The concept of Fed accommodation has been around since at least October 1987, when the stock market crash prompted the Alan Greenspan-led central bank to cut interest rates. A put option is a financial derivative that gives the holder the right, but not the obligation, to sell the underlying asset at a certain level, known as the strike price, which serves as an insurance policy against market declines.

Some economists and analysts have even suggested the Fed welcome or even target market losses, which could serve to tighten financial conditions as investors cut spending.

Related: Do higher stock prices make it harder for the Fed to fight inflation? The short answer is yes.

Former New York Fed President William Dudley argued At the beginning of this year, the central bank will not be able to deal with inflation unless investors suffer, it is approaching a 40-year high. “It’s hard to know how much the Federal Reserve will need to do to get inflation under control,” Dudley wrote in a Bloomberg column in April. “But one thing is certain: to be effective, stock and bond investors will have to lose more than they ever have.”

Some market participants are not sure about it. Aoifinn Devitt, Chief Investment Officer, Moneta He said the Fed likely sees stock market volatility as a byproduct of efforts to tighten monetary policy rather than a goal.

“They understand that stocks can be collateral damage in a tightening period,” but that doesn’t mean stocks “need to crash,” Devitt said.

However, as the Fed focuses on taming inflation, it is willing to put up with seeing the markets decline and the economy slow down or even go into recession.

Last: The Fed’s Powell said in his Jackson Hole speech that lowering inflation would hurt households and businesses

The Federal Reserve kept the target federal funds rate at 0% to 0.25% between 2008 and 2015 as it dealt with the financial crisis and its aftermath. The Fed also cut rates to near zero again in March 2020 in response to the COVID-19 pandemic. Dow with lowest interest rate

And the S&P 500 large-cap index rose more than 40%

It is up more than 60% from March 2020 to December 2021, according to Dow Jones Market Data.

Courtney at Exencial Wealth Advisors said investors are used to “more than a decade of lower interest rate tailwinds” as they look for the Fed to step in with its “put” if things get tough.

“I think the Fed’s message (now) is, ‘You’re not going to get this tailwind anymore,'” Courtney told MarketWatch on Thursday. where the temperature should be kept at a certain level all day and all night and I think that’s the message that the markets can do and develop on its own without the greenhouse effect.

To see: Opinion: The stock market trend is relentlessly down, especially after this week’s big daily lows.

Meanwhile, the Fed’s aggressive stance means investors are bracing for what could be “a couple of daily bumps” that could be “one last big leak,” Liz Young, head of investment strategy at SoFi, said on Thursday. Note.

“It may sound strange, but if it happens quickly, meaning in the next few months, it will actually become a bull event in my opinion,” he said. “It could be a swift and painful downturn, resulting in a renewed move that is more durable later in the year as inflation declines more markedly.”

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