Can the Fed moderate inflation without further depressing the stock market?  What’s next for investors.

Can the Fed moderate inflation without further depressing the stock market? What’s next for investors.

The Federal Reserve doesn’t want to slam the stock market as it quickly raises interest rates in an effort to tame inflation still running hot – but investors need to brace for more pain and volatility as policymakers don’t policy to be habitable. due to deeper selling, said investors and strategists.

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

US stocks fell sharply over the past week after hopes of a significant cooling in inflation were dashed by a warmer than expected August inflation reading. The data reinforced expectations among traders of fed funds futures for a rate hike of at least 75 basis points when the Fed concludes its policy meeting on September 21, with some traders and analysts looking for an increase of 100 basis points, or a full percentage point. point.

Preview: The Fed is ready to tell us how much ‘pain’ the economy will have. It will not yet hint at the recession though.

Dow Jones Industrial Average DJIA,
-0.45%
logged a weekly drop of 4.1%, and the S&P 500 SPX,
-0.72%
fell 4.8% and the Nasdaq Composite COMP,
-0.90%
suffered a decrease of 5.5%. The S&P 500 ended Friday below the 3,900 level seen as an important technical support area, with some chart watchers expecting a test of the large-cap benchmark 2022 low at 3,666.77 set for June 16.

Look: Stock market bears appear to be holding the upper hand as S&P 500 falls below 3,900

A profit warning from global shipping giant and economic bellwether FedEx Corp. FDX,
-21.40%
further worries about the recession, which contributed to stock market losses on Friday.

Read: Why the drop in FedEx stock is so bad for the entire stock market

Treasuries also fell, with yield on the 2-year Treasury note TMUBMUSD02Y,
3.867%
rising to an almost 15-year high above 3.85% on expectations the Fed will continue to push for higher rates in the coming months. Production rises as prices fall.

Investors are operating in an environment where the central bank is widely seen as needing to rein in stubborn inflation after the notion of a “Fed put” has been abandoned in the stock market.

The concept of the Fed has been around since at least the October 1987 stock market crash prompted the Alan Greenspan-led central bank to lower 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 set level, known as the strike price, which acts as an insurance policy against market downturns.

Some economists and analysts have even suggested that the Fed should welcome market losses, or even aim for them, as financial conditions could tighten as investors cut back on spending.

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

William Dudley, the former president of the New York Fed, argued earlier this year that the central bank will not get a handle on inflation that is running close to a 40-year peak unless they put investors at risk. “It’s hard to know how much the Federal Reserve will need to do to control inflation,” Dudley wrote in a Bloomberg column in April. “But one thing is certain: to be effective, it will have to inflict more losses on stock and bond investors than it has so far.”

Some market participants are not sure. Aoifinn Devitt, chief investment officer at Moneta, the Fed said the Fed likely sees stock market volatility as a byproduct of its efforts to tighten monetary policy, not an objective.

“They recognize that stocks can suffer collateral damage in a tightening cycle,” but that doesn’t mean stocks have to “fall,” Devitt said.

The Fed, however, is willing to see markets decline and the economy slow and even get affected by the recession as it aims to moderate inflation, she said.

The Federal Reserve kept the target fed funds rate at a range of 0% to 0.25% between 2008 and 2015, as it dealt with the financial crisis and its aftermath. The Fed cut rates to near zero again in March 2020 in response to the COVID-19 pandemic. With rock bottom interest rate, the Dow DJIA,
-0.45%
skyrocketed over 40%, while the large-cap S&P 500 SPX index,
-0.72%
jumping over 60% between March 2020 and December 2021, according to Dow Jones Market Data.

Investors have gotten used to “the tailwind of more than a decade of falling interest rates” as they look for the Fed to address its “put” if things get rocky, said Courtney at Exencial Wealth Advisors.

“I think (now) the Fed’s 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 the markets are like greenhouses where the temperatures have to be kept at a certain level during the day and throughout the night, and I think that the message of the markets. they can and should grow on their own without the greenhouse effect.”

Look: Opinion: The stock market trend is relentlessly bearish, especially after this week’s big daily declines

Meanwhile, the Fed’s aggressive stance means investors should be prepared for “a few more daily stabs” that could be “the last big outflow,” Liz Young, SoFi’s head of investment strategy, said in Thursday. Note.

“This may sound strange, but if that happens quickly, meaning within the next few months, that’s the bull case in my opinion,” she said. “It could be a quick and painful fall, leading to a renewed move higher later in the year that is more sustained, as inflation falls more significantly.”

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