Can the Fed tame inflation without further crushing the stock market? What’s next for investors?

Can the Fed tame inflation without further crushing the stock market?  What's next for investors?
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The Federal Reserve isn’t trying to blame the stock market for rapidly raising interest rates to slow inflation — but investors need to be prepared for more pain and volatility because policymakers won’t be discouraged by a deepening sell-off, Investors and strategists said.

“I don’t think they’re trying to reduce inflation by destroying stock prices or bond prices, but it does have the effect.” Tim Courtney, chief investment officer at Exencial Wealth Advisors, said in an interview.

US stocks hopes for a marked cooling in inflation Warmer-than-expected August inflation reading. The data bolstered expectations for a rate hike of at least 75 basis points among futures traders in Fed funds as the Fed concludes its policy meeting on Sept. 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 ‘suffering’ the economy will suffer. It won’t signal recession, though.

Dow Jones Industrial Average

S&P 500 slumps 4.1% for the week

It fell 4.8% and the Nasdaq Composite

It fell 5.5%. The S&P 500 ended Friday below the 3,900 level, which is seen as a key technical support area, and some chart watchers are eyeing the potential for a test for the 2022 low of the large scale indicator of 3,666.77 set on June 16.

To see: Stock market bears appear to hold the upper hand as S&P 500 drops below 3,900

A profit alert from global shipping giant and economic pioneer FedEx Corp.

It further fueled recession fears that contributed to stock market losses on Friday.

To read: Why is FedEx’s stock plunge so bad for the entire stock market?

Treasuries also fell, along with the yield on the 2-year Treasury bill.

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

Investors operate in an environment where the central bank’s need to rein in persistent inflation is widespread. eliminated the notion of a figurative “Fed put” in the stock market.

The concept the Fed put in has encouraged the central bank, led by Alan Greenspan, to cut interest rates since at least the stock market crash of October 1987. An put option is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a specified level, known as the strike price, which acts as an insurance policy against a market downturn.

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

Related: Are higher stock prices complicating the Fed’s fight against inflation? The short answer is ‘yes’

William Dudley, former chairman of the New York Fed, said: earlier this year that the central bank will not be able to deal with inflation. That’s approaching a 40-year high unless investors suffer. “It’s hard to know how much the Fed has to do to contain inflation,” Dudley wrote in a Bloomberg column in April. “But one thing’s for sure: To be effective, it will have to hurt stock and bond investors more than ever.”

Some market participants were not convinced. Moneta chief investment officer Aoifinn Devitt, He said the Fed likely sees stock market volatility not as a goal but as a byproduct of its efforts to tighten monetary policy.

“They acknowledge that collateral damage can occur in a tightening cycle,” Devitt said, but that doesn’t mean the stock “should” crash.

But the Fed said it’s ready to see markets fall as it focuses on taming inflation and the economy slows or even enters a recession.

Lately: Fed’s Powell said in his Jackson Hole speech that lowering inflation would cause pain to households and businesses

The Federal Reserve kept the federal funds target rate in the 0% to 0.25% range between 2008 and 2015 as it grappled with the financial crisis and beyond. The Fed also brought rates back to near zero in March 2020 in response to the COVID-19 pandemic. Dow with lowest interest rate

Large-scale S&P 500 index jumps over 40%

According to Dow Jones Market Data, it climbed over 60% between March 2020 and December 2021.

Courtney of Exencial Wealth Advisors said investors are getting used to “the tailwind of falling interest rates for more than a decade” as they expect the Fed to step in if things get rough.

“I think (now) the Fed message is ‘you’re not going to get this tailwind anymore,'” Courtney told MarketWatch on Thursday. “I think markets can grow, but they will have to grow on their own because markets are like a greenhouse where temperatures have to be kept at a certain level all day and all night, and I think that’s the message from the markets. It can and should grow on its own without the greenhouse effect.”

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

The Fed’s aggressive stance means investors need to be prepared for “a few more days of dips” that could prove to be “one last big flush”, SoFi’s head of investment strategy Liz Young said on Thursday. notes.

“This may sound strange, but if this happens quickly, ie in the next few months, that would actually be a bullish situation in my view,” he said. “There could be a rapid and painful decline, which could lead to a higher move later in the year, which is more resilient as inflation drops more significantly.”

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