The Dow Jones Falls 500 Points Because Jerome Powell's Fed 'Ain't Gonna Blink'

The Dow Jones Falls 500 Points Because Jerome Powell’s Fed ‘Ain’t Gonna Blink’

It took stock market investors a while to make up their minds, but when the closing bell rang on Wednesday, it was clear they didn’t like what they’d heard from the Federal Reserve and its chairman. Jerome Powell.

See: Fed Approves Third Big Interest Rate Hike, Signals More Before Year End

Central bankers have also forecast an additional 125 basis points in rate hikes by the end of the year, which would take the benchmark interest rate to a midpoint of 4.4% by the end of the year. of the year, plus a “terminal” rate – or peak – at 4.6% in 2023. They don’t expect any rate cuts until 2024.

Analysts said Powell’s projections and comments conveyed the same message the Fed chairman delivered during a speech at a monetary policy symposium in Jackson Hole, Wyoming, in late August: The Fed intends to continue to tighten until it gets inflation under control.

“He clearly intends to show the market that he means what he says, that he is not going to blink,” said Mel Casey, senior portfolio manager at FBB Capital Partners, during a telephone interview. “He’s not going to worry about what the market is doing. For too long people have seen that as a concern as well, but the concern here is inflation.

See: Can the Fed rein in inflation without further crushing the stock market? What investors need to know.

The Dow Jones Industrial Average DJIA,
-1.70%
fell more than 500 points, or 1.7%, to end at 30,183.78. The S&P 500 SPX,
-1.71%
fell 1.7% to 3,789.93. The Nasdaq Composite COMP,
-1.79%
fell 1.8%, ending at 11,220.19.

“We will continue until the job is done,” Powell told a news conference after the release of the Fed’s policy statement and economic projections. “I wish there was a painless way to do this. There isn’t.

August’s Consumer Price Index report released earlier this month found inflation had spread more widely across the economy, with the year-on-year rate slowing less than expected at 8.3%. In his Jackson Hole speech, Powell warned that the economy and households would suffer “some pain” from the bank’s more aggressive efforts to bring down inflation.

“I believe they are doing what needs to be done,” said Guido Petrelli, founder and CEO of Merlin Investor. “What I don’t see as a good sign from the meeting is that they postponed when inflation is going to peak, so everything was extended.”

FBB’s Casey compared investors’ reaction to the five stages of grief: denial, anger, negotiation, depression and acceptance.

“We’re trying to gain acceptance,” he said, after episodes of “hope” that emerged during market rallies earlier this year, particularly when the S&P 500 rebounded around 17%. from its June low before Powell’s speech in Jackson Hole.

Lily: Fed predicts major slowdown in economy and rising unemployment as it battles inflation

“No one knows if this process will lead to a recession, or if so, how big that recession would be,” Powell said at the press conference. “It will depend on how quickly inflationary pressures on wages and prices come down, whether expectations stay anchored and also whether we get more labor supply.”

He added that the chances of a soft landing will diminish if policy has to get tighter for the Fed to hit its 2% inflation target.

See: World’s largest asset manager sees ‘no Goldilocks scenario’ as central banks grapple with inflation and growth

But according to Casey, the chances of a soft landing are waning as the CPI numbers have been “stubborn and sticky”.

“We’ve had a lot of rate increases, and we’ve done it very quickly in the last three meetings,” he said. “We haven’t really seen anything show up in the numbers yet. This gain has not yet been observed.

Trading in other financial markets was choppy after the data was released. The 2-year Treasury yield TMUBMUSD02Y,
4.126%
hit its highest level since October 2007, according to Dow Jones Market Data. The 10-year Treasury yield TMUBMUSD10Y,
3.543%
was 3.511%, down 5 basis points.

Gold for delivery in December GCZ22,
-0.36%

GC00,
-0.36%
rose $4.60, or 0.3%, to settle at $1,675.70 an ounce on Comex. The ICE US Dollar Index DXY,
+0.82%,
an indicator of the strength of the dollar against a basket of rival currencies, advanced 1%, after Russian President Vladimir Putin ordered reservists to mobilize and made remarks considered a threat to use weapons nuclear weapons as he escalated the war in Ukraine.

See: The Fed’s Hard Task: History Shows Inflation Takes 10 Years on Average to Return to 2%

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