(Bloomberg) – Stocks saw some crazy swings, with traders overwhelmed by the slew of headlines that followed the Federal Reserve’s decision, and ended up signaling at least one thing: policies will remain aggressively restrictive — increasing the chances of a soft one landing seems elusive.
The S&P 500 extended its plunge to over 20% from a record in January. Following the Fed announcement, the gauge jerked, rising 1.3% at one point. US two-year yields topped 4% for the first time since 2007. Another key part of the Treasury curve inverted, with 10-year rates outperforming 30-year bonds, a proven harbinger of a recession. The dollar recovered.
Jerome Powell promised officials would crush inflation after raising rates by 75 basis points for a third straight month, signaling even more aggressive rate hikes than investors had imagined. He said the main message was that officials were “determined” to bring inflation down to the Fed’s 2 percent target, adding that “we will stick with it until the job is done.” The phrase referred to the title of former Fed Chair Paul Volcker’s memoir, Keeping at It.
Officials forecast rates would hit 4.4% by the end of this year and 4.6% in 2023, a more radical shift in their so-called dot plot than expected. That means a fourth straight hike of 75 basis points could be on the table for the next gathering in November — about a week before the US midterm elections.
“Jerome Powell almost channeled his inner Paul Volcker today as he discussed the bold and swift steps the Fed has taken and likely will continue to take in attempting to stamp out painful inflationary pressures and stave off an even worse scenario later,” he said Seema Shah, Chief Global Strategist at Principal Global Investors. “With the new interest rate projections, the Fed is planning a hard landing – a soft landing is almost out of the question.”
- “We believe that if growth (and jobs) slows significantly in tandem with these tightening policies, markets and, by extension, the economy will grow fed up with tightening too much,” said Rick Rieder, BlackRock’s Chief Investment Officer of Global steady income.
- “Fed officials appear increasingly in favor of moving policy further into hawkish territory to prevent high inflation from taking hold,” wrote Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management. “Since World War II, 11 out of 14 Fed tightening cycles have been followed by a two-year recession.”
- “Today’s Fed action, combined with continued roller coaster-like market volatility, underscores investor unease amid heightened economic and market uncertainties caused by high inflation, corporate earnings warnings, geopolitical concerns and other factors affecting both the Wall Street and Main Street heavily. said Greg Bassuk, Chief Executive Officer of AXS Investments.
- “They have a short window of opportunity to trade aggressively, and they seem eager to take advantage of it,” said Jan Szilagyi, co-founder of Toggle AI, an investment research firm.
- “The Fed’s initial releases from the September meeting are clearly hawkish,” said Krishna Guha, vice chairman of Evercore ISI. “The macro projections signal an increased risk of a harder landing.”
- “The Fed was late in recognizing inflation, late in starting to raise interest rates and late in unwinding asset purchases,” said Greg McBride, Bankrate’s chief financial analyst. “They’ve been playing catch-up ever since. And they’re not done yet.”
Important events this week:
- Bank of Japan monetary policy decision, Thursday
- The Bank of England rate decision on Thursday
- US Conference Board benchmark index, Initial Jobless Claims, Thursday
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Here are some of the key movements in the markets:
- The S&P 500 was down 1.7% as of 4 p.m. New York time
- The Nasdaq 100 fell 1.8%
- The Dow Jones Industrial Average fell 1.7%
- The MSCI World Index fell 1.5%
- The Bloomberg Dollar Spot Index rose 0.7%
- The euro fell 1.2% to $0.9847
- The British pound fell 0.9% to $1.1281
- The Japanese yen was little changed at 143.88 per dollar
- The 10-year government bond yield fell six basis points to 3.51%
- The 10-year German government bond yield fell three basis points to 1.89%
- The 10-year UK government bond yield rose 2 basis points to 3.31%
- West Texas Intermediate Crude fell 0.7% to $83.34 a barrel
- Gold futures rose 0.6% to $1,681.40 an ounce
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