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

The Federal Reserve isn’t trying to slam the stock market as it rapidly raises interest rates in its bid to quell still-burning inflation – but investors should be prepared for more pain and volatility as policymakers politicians won’t be intimidated by a sell-off, investors and strategists said.

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

US stocks fell sharply last week after hopes of a sharp slowdown in inflation were dashed by a A higher than expected inflation rate for the month of August. The data cemented fed funds futures traders’ expectations 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 a 100 basis point increase, or a full percentage. indicate.

Insight: The Fed is ready to tell us how badly the economy will suffer. It still won’t hint at the recession.

The Dow Jones Industrial Average DJIA,
-0.45%
recorded a weekly decline of 4.1%, while the S&P 500 SPX,
-0.72%
fell 4.8% and the Nasdaq Composite COMP,
-0.90%
fell by 5.5%. The S&P 500 ended Friday below the 3,900 level seen as an important area of ​​technical support, with some chart watchers eyeing the possibility of a test of the large-cap benchmark’s 2022 low at 3,666. .77 set June 16.

See: Stock bears hold sway as S&P 500 falls below 3,900

A profit warning from global shipping giant and economic indicator FedEx Corp. FDX,
-21.40%
fueled recession fears further, contributing to stock market losses on Friday.

Lily: Why FedEx’s Stock Drop Is So Bad For The Entire Stock Market

Treasuries also fell, with the yield on the 2-year Treasury note TMUBMUSD02Y,
3.867%
hitting a nearly 15-year high above expectations of 3.85%, the Fed will continue to push rates higher in the months ahead. Yields increase as prices fall.

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

The concept of a Fed put has been around since at least the October 1987 stock market crash that prompted the central bank led by Alan Greenspan to cut interest rates. A real put option is a financial derivative that gives its holder the right but not the obligation to sell the underlying asset at a defined level, called the strike price, serving as an insurance policy against a decline in the price. market.

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

Related: Is rising stock prices making 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 control inflation which are hovering near a 40-year high unless they hurt investors. “It’s hard to know how much the Federal Reserve will have to do to get inflation under control,” 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 done so far.”

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

“They recognize 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 seeing markets decline and the economy slow and even tip into recession as it focuses on controlling inflation, she said.

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

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

Investors have become accustomed to the “tailwind for more than a decade of falling interest rates” while looking for the Fed to step in with its “put” if things get tough, Courtney said at Exencial Wealth Advisors.

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

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

Meanwhile, the Fed’s aggressive stance means investors need to be prepared for what could be “a few more daily downside jabs” that could eventually turn out to be a “final big hunt,” said Liz Young, head of investment strategy at SoFi, in a Thursday. Remark.

“It may sound strange, but if it happens quickly, meaning within the next couple of months, it actually becomes bull’s case in my opinion,” she said. “It could be a quick and painful decline, leading to a further rise later in the year that is more sustainable as inflation falls more significantly.”

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