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

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Blue-chip stocks plunged to their lowest level since 2020 on Friday, continuing a bad slide that began in August as investors try to fight economic headwinds in the United States and around the world that will only weaken. ‘aggravate.

Major stock indexes ended the week with losses, capping the fifth decline in the past six weeks. The Dow Jones Industrial Average fell 483 points, or 1.6%, at Friday’s close, and fell below the 30,000 mark. The index narrowly avoided closing in bearish territory, a drop of 20% from its previous peak. The S&P 500 slipped 1.7% and the Nasdaq Composite 1.8%.

The Federal Reserve has pledged to keep inflation under control – even if the slowing economy means rising unemployment and households and businesses feel some pain. And although the Fed’s decision to raise interest rates this week was widely expected, stock markets are already feeling the pain.

“The Fed’s continued balance between restoring price stability in return for economic hardship has rattled markets as hopes for a soft landing quickly fade,” said Nicole Tanenbaum, partner and strategist in Chief Investment Officer at Checkers Financial Management. “Monetary policy is a blunt instrument, and investors are rightly concerned that the Fed is going too far too fast before it is able to accurately assess the effects of its policy on the economy.”

Bad market news — and the Fed’s forecast of a sharp economic downturn — could also affect campaigns for this fall’s midterm congressional elections, where Republicans hoped voters would blame the president. Biden and the Democrats for high inflation. Inflation has become a slightly less salient issue among voters, as people say they feel better about the economy and have some breathing room thanks to lower gas prices. But the turmoil in the markets could become a hot topic on the track.

The total weight of Fed actions since March – already pushing a key interest rate three percentage points, with more increases to come – will only be felt later this year or next. But financial markets are heeding the central bank’s promise and sounding alarm bells, making it clear that no matter how many times Fed officials say they will do whatever they can to crush inflation. , the idea still unsettles Wall Street.

“I think things are likely to get worse before they get better,” said Dan Ives, managing director and senior equity research analyst at Wedbush Securities.

Analysts say the drop is not just about the Fed’s actions so far, but also about further tightening to come and the growing likelihood that the Fed won’t be able to lower inflation without triggering a recession. This type of slowdown could also quickly affect corporate earnings.

“A soft landing would be very difficult, and we don’t know – nobody knows – whether this process will lead to a recession or, if so, how deep that recession would be,” the Fed chairman said Wednesday. , Jerome H. Powell, after the Fed rate announcement.

Oversized rate hikes are the Fed’s new normal

The central bank is rushing to cool the economy and lower consumer prices. Officials do not yet see enough progress. But market jitters reflect a national and global economy already headed for a slowdown.

Oil prices fell to their lowest levels since January. The S&P energy sector closed down 6.75%.

Shares in big tech companies like Apple, Amazon, Microsoft and Meta Platforms fell on Friday. (Amazon founder Jeff Bezos owns The Washington Post.) Goldman Sachs cut its year-end forecast for the S&P 500, largely due to rising interest rates. On the other hand, bond yields rose this week after the Fed’s latest rate hike, and yields on two-year and 10-year Treasuries hit highs not seen in more than a decade.

Major stock indices are down significantly for the year so far, although the long bull market that lasted until recently means they are still up more than 30% over the past five years.

Bad economic news could become a political issue. House Minority Leader Kevin McCarthy (R-Calif.) announcing the official GOP campaign platform Friday, broached the subject: “We want a strong economy. This means you can refill your tank. You can buy groceries. You have enough money left over to go to Disneyland and save for a future – as paychecks go up, they don’t go down.

The brutality close to the the week came after the Fed raised rates again by three-quarters of a percentage point, its third such move and fifth hike of the year in its fight against inflation. Wednesday’s increase would have been considered extremely large until recently. But Fed officials want to push rates past the “neutral” zone of around 2.5%, where rates are not slowing or stimulating the economy, and into “restrictive territory” that is dampening demand. consumers.

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

Why is the Fed raising interest rates?

This rate does not directly control rates for mortgages and other loans. But it does influence how much banks and other financial institutions pay to borrow, helping to drive loan pricing more broadly. And crucially, the Fed’s own communications — whether remarks from Fed officials or economic projections from policymakers — are key to shaping financial conditions and getting markets to start pricing in rate hikes. which are yet to come.

Monetary policy operates with a lag, and the Fed’s rate hikes so far have yet to lead to a significant drop in inflation. But movements manifest themselves in the economy in other ways.

“Financial conditions were generally affected long before we announced our decisions,” Powell said this week. “Then changes in financial conditions start to affect economic activity quite quickly, within months. But it will likely take some time to see the full effects of changing financial conditions on inflation.

Five charts explaining why inflation is so high

Diane Swonk, chief economist at KPMG, said traders are also worried about how the Fed’s measures will be amplified as other central banks also step up their fight against inflation. The Fed was among a list of global central banks to raise rates this week – the Bank of England raised its rate by half a percentage point on Thursday, for example, and warned that Britain was may already be in recession. The fear is that the economies of many countries will not be able to withstand an extreme downturn. Fed rate hikes also mean more debt for poor countries.

European stocks also fell sharply on Friday, partly after Britain announced a sweeping round of tax cuts to hedge against a recession.

Economists and traders worry that as policymakers all make big changes at once, they risk doing too much, not just for their own economies, but for the world.

“Synchronous, not synchronized,” Swonk said of back-to-back moves by various central banks. “It was not planned.”

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