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

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

Blue-chip stocks fell to their lowest level since 2020 on Friday, continuing a nasty slide that began in August as investors tried to deal with economic headwinds in the U.S. and around the world that could only get worse.

Major stock indexes ended the week with losses, posting their fifth decline in the last six weeks. The Dow Jones industrial average fell 483 points, or 1.6 percent, below 30,000 at Friday’s close. The index avoided closing in bear market territory, down 20 percent from its previous high. The S&P 500 fell 1.7 percent and the Nasdaq Composite fell 1.8 percent.

The Federal Reserve has promised to keep inflation under control — even if the slowing economy raises unemployment and leaves households and businesses feeling some pain. While the Fed is widely expected to raise interest rates this week, the stock markets are already feeling the pain.

“The Fed’s ongoing balancing act between restoring price stability versus economic pain has roiled markets as hopes for a soft easing quickly faded,” said Nicole Tanenbaum, partner and chief investment strategist at Checkers Financial Management. “Monetary policy is a blunt instrument, and investors are rightly concerned that the Fed may move too quickly without being able to accurately assess the effects of its policies on the economy.”

The bad market news — and the Fed’s forecast of a sharply slowing economy — could also affect campaigns for this fall’s congressional midterm elections, where Republicans hope voters will blame President Biden and Democrats for high inflation. Inflation became a slightly less prominent issue among voters as people said they felt better about the economy and took some breather from lower gas prices. But turmoil in the markets can become a hot topic on the trail.

The full weight of the Fed’s actions since March — having already raised its key interest rate by 3 percentage points and expecting more hikes — may not be felt until later this year or beyond. But financial markets are taking the central bank’s pledge and sounding alarm bells — making it clear that no matter how many times Fed officials say they will do everything they can to crush inflation, the idea still rattles Wall Street.

“I believe it’s probably going to get worse before it gets better,” said Dan Ives, managing director and chief equity research analyst at Wedbush Securities.

Analysts say the decline is due not only to the Fed’s actions so far, but also to further tightening ahead and the increased likelihood that the Fed will be unable to lower inflation without triggering a recession. This kind of decline can quickly hit corporate profits as well.

“A soft landing is going to be very difficult, and we don’t know — nobody knows — whether this process will lead to a recession or, if so, how significant that recession will be,” Fed Chairman Jerome H. Powell said on Wednesday. Fed interest rate announcement.

Interest rate hikes are the Fed’s new norm

The central bank is rushing to cool the economy and lower consumer prices. Officials still don’t see enough progress. But market jitters now reflect the local and global economy aimed at slowing down.

Oil prices fell to their lowest level since January. The S&P energy sector fell 6.75 percent.

Shares Big tech firms including Apple, Amazon, Microsoft and Meta Platforms fell on Friday. (Amazon Chairman Jeff Bezos owns The Washington Post.) Goldman Sachs cut its year-end S&P 500 forecast, largely due to rising interest rates. On the other hand, bond yields rose this week after the Fed’s latest rate hike, and 2-year and 10-year Treasury rates hit their highest levels not seen in more than a decade.

Major market indexes are down significantly for the year so far, although the long bull market that has continued until recently shows them 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-Calif.), Announces the GOP’s official campaign agenda on Friday: “We want a strong economy. This means you can fill up your tank. You can buy food. You have enough money to go to Disneyland and save for the future – wages are going up, they’re not going down anymore.”

Brutal close came a week later The Fed still raised interest rates by three-quarters of a percentage point, the third such move and the fifth hike of the year to fight inflation. Wednesday’s increase was considered unusually large until recently. But Fed officials want to cut interest rates from the “neutral” zone, which neither slows nor dehydrates the economy, to a “limited area” that dampens consumer demand by about 2.5 percent.

The Fed’s benchmark interest rate is now between 3 percent and 3.25 percent, and officials expect it to rise above 4 percent by the end of the year.

Why is the Fed raising interest rates?

This rate does not directly control rates on mortgages and other loans. But it affects how much banks and other financial institutions pay to borrow money, which helps control credit prices more broadly. Most importantly, the Fed’s own communications—whether Fed officials’ statements or policymakers’ economic forecasts—are key to shaping financial conditions and starting markets to price in what are still expected rate hikes.

Monetary policy is notoriously backward-looking, and the Fed’s rate hikes to date have yet to significantly lower inflation. But the movements manifest themselves in other ways in the economy.

“Financial conditions are generally affected well before we announce our decisions,” Powell said this week. “Then changes in financial conditions begin to affect economic activity quite quickly within a few months. However, it will likely take some time to see the full impact of changes in financial conditions on inflation.”

Five charts that explain why inflation is so high

Diane Swonk, chief economist at KPMG, said traders were worried about how the Fed’s steps would be scaled up as other central banks stepped up their fight against inflation. The Fed was among a list of global central banks to raise rates this week – the Bank of England, for example, raised interest rates by half a percentage point on Thursday and warned that the United Kingdom may already be in recession. The fear is that the economy of many countries will not be able to withstand an extreme slowdown. A Fed rate hike also means a bigger debt burden for poor countries.

European stocks also fell sharply on Friday, partly after the United Kingdom announced a series of tax cuts to stave off recession.

Economists and traders fear that when politicians take big swings at once, they risk overshooting not only their own economies, but the world as well.

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

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