Can the Fed Tame Inflation Without Further Crushing the Stock Market? What’s next for investors?

US stocks fell sharply last week after hopes of an apparent slowdown in inflation by . were dashed Inflation reading for August hotter than expected. The data reinforced expectations among Fed fund futures traders of a rate hike of at least 75 basis points when the Federal Reserve concludes its policy meeting on September 21, with some traders and analysts looking for a hike of 100 basis points, or a full percentage. a point.

Preview: The Fed is ready to tell us how much “pain” the economy will suffer. However, they still do not hint at stagnation.

Dow Jones Industrial Average DJIA,
-0.45%
recorded a weekly decline of 4.1%, while the S&P 500 SPX,
-0.72%
down 4.8% and the Nasdaq Composite,
-0.90%
It suffered a drop of 5.5%. The S&P 500 finished Friday below the 3900 level seen as an important area of ​​technical support, with some chart watchers eyeing the possibility of a test of the majors’ 2022 low of 3666.77 set on June 16.

We see: Bears were seen in the stock market holding onto control as the S&P 500 fell below 3900

Earnings warning from global shipping giant and economic leader FedEx Corp. FDX,
-21.40%
Further stoked fears of an economic recession, contributing to Friday’s stock market losses.

Read: Why FedEx Stock Drop Is So Bad For The Entire Stock Market

Treasuries also fell, with a two-year Treasury yield TMUBMUSD02Y,
3.867%
Rising to a nearly 15-year high above 3.85% on expectations that the Federal Reserve will continue to push interest rates higher in the coming months. Yields rise as prices fall.

Investors operate in an environment in which the need for a central bank to rein in stubborn inflation is widely considered Eliminate the idea of ​​the metaphorical “Fed-Reserve Mode” in the stock market.

The concept of Fed status has been around since at least the October 1987 stock market crash caused the central bank led by Alan Greenspan to cut 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 specified level, known as the strike price, and acts as an insurance policy against a market decline.

Some economists and analysts have even suggested the Fed welcome or even target market losses, which could tighten financial conditions as investors cut back on spending.

Related: Are rising stock prices making it harder for the Fed to fight inflation? The short answer is yes.

William Dudley, former president of the Federal Reserve Bank of New York, argued Earlier this year the central bank will not deal with inflation This is close to a 40-year high unless they cause investors to suffer. “It’s hard to know how much the Fed will need to do to control inflation,” Dudley wrote in an April Bloomberg column. “But one thing is certain: To be effective, it must cause losses to investors in stocks and bonds more than they have suffered so far.”

Some market participants are not convinced. Ovin Devitt, Chief Investment Officer at Moneta, The Fed said it likely sees stock market volatility as a byproduct of its efforts to tighten monetary policy, rather than 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.

She said the Fed is willing, however, to put up with seeing markets plummet, the economy slow and even slide into recession as it focuses on taming inflation.

Recently: Fed Powell says lowering inflation will cause pain to households and businesses in Jackson Hole speech

The Federal Reserve kept the target rate for federal funds in a range of 0% to 0.25% between 2008 and 2015, as it dealt with the financial crisis and its aftermath. The Federal Reserve also cut interest rates to near zero again in March 2020 in response to the COVID-19 pandemic. With a very low interest rate, Dow Jones Industrial Average,
-0.45%
The S&P 500 SPX has skyrocketed to more than 40%,
-0.72%
It jumped more than 60% between March 2020 and December 2021, according to market data from Dow Jones.

Investors are accustomed to “the tailwind of over a decade with low interest rates” as they look for the Federal Reserve to intervene in a “situation” in the event of turmoil, said Courtney of Exencial Wealth Advisors.

“I think (for now) the Fed’s message is ‘You’re not going to get these tailwinds anymore,'” Courtney told MarketWatch on Thursday. On temperatures at a certain level throughout the day and all night, I think that is the message that markets can and should grow on their own without the greenhouse effect. “

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

Meanwhile, the Federal Reserve’s aggressive stance means investors should be prepared for what could be “a few more daily stabs to the bottom” that could eventually prove to be a “last big influx,” said Liz Young, SoFi’s head of investment strategy. , On Thursday. note.

“This may sound strange, but if it happens quickly, meaning that over the next couple of months, that really becomes the case for a bull in my view,” she said. “It could be a rapid and painful decline, leading to a renewed upward movement later in the year that is more permanent, as inflation drops significantly.”