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 bash the stock market as it rapidly raises interest rates in its bid to rein in still-red-hot inflation, but investors should be prepared for more pain and volatility because policymakers Politicians are not going to cower. for a sell-off, investors and strategists said.

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

US stocks fell sharply last week after hopes of a sharp cooling in inflation were dashed by a August inflation reading better than expected. The data cemented expectations among fed funds futures traders for a rate hike of at least 75 basis points when the Fed concludes its policy meeting on Sept. 1. 21, with some traders and analysts looking for an increase of 100 basis points, or a full percentage point.

Advance: The Fed is ready to tell us how much ‘pain’ the economy will suffer. However, it will not hint at a recession just yet.

The Dow Jones Industrial Average

recorded a weekly decline of 4.1%, while the S&P 500

fell 4.8% and the Nasdaq Composite

suffered a 5.5% drop. The S&P 500 ended Friday below the 3,900 level seen as a major area of ​​technical support, with some chart watchers eyeing the potential for a test of the large-cap benchmark index’s 2022 low at 3,666.77 set on the 16th. of June.

Watch: Stock market bears hold the upper hand as S&P 500 dips below 3900

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

further fueled recession fears, contributing to stock market losses on Friday.

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

Treasuries also fell, with yields on the 2-year Treasury note.

rising to a nearly 15-year high above 3.85% on expectations that the Fed will continue to push rates higher in coming months. Yields rise when prices fall.

Investors are operating in an environment where the central bank’s need to rein in stubborn inflation is seen as having eliminated the notion of a figurative “Fed put” in the stock market.

The concept of a Fed put option has been around since at least the October 1987 stock market crash that prompted the Alan Greenspan-led central bank to lower interest rates. An actual 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 acts as an insurance policy against a market decline.

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

Related: Are higher stock prices making it harder for the Federal Reserve to fight inflation? The short answer is yes’.

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

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

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

The Fed, however, is prepared to tolerate falling markets and a slowing economy and even slide into a recession as it focuses on controlling inflation, he said.

Recent: Fed’s Powell says cutting inflation will cause pain for households and businesses in Jackson Hole speech

The Federal Reserve kept the target federal funds rate in a range of 0% to 0.25% between 2008 and 2015, while dealing 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. With a minimum interest rate, the Dow

soared more than 40%, while the S&P 500 large-cap index

it jumped more than 60% between March 2020 and December 2021, according to Dow Jones Market Data.

Investors got used to the “tailwind for more than a decade with falling interest rates” as they waited for the Fed to step in with its “put” should things get tough, said Courtney of Exencial Wealth Advisors. .

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

Watch: Opinion: The Stock Market Trend Is Relentlessly Bearish, Especially After This Week’s Big Daily Declines

Meanwhile, the Fed’s hawkish stance means investors need to be prepared for what may be “a few more daily stabs lower” that could eventually turn into a “big final shock,” said Liz Young, chief strategist at SoFi investment, on a Thursday. Note.

“This may sound strange, but if that happens quickly, meaning within the next few months, it actually becomes the bull case in my opinion,” he said. “It could be a quick and painful drop, resulting in a new move higher later in the year that is more durable, as inflation falls more noticeably.”

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