Stocks saw some crazy gyrations, with traders overwhelmed by the many headlines that followed the Federal Reserve decision and ended up signaling at least one thing: policy will remain aggressively tight — making the odds of a soft landing look elusive.
(Bloomberg) — Stocks saw some crazy gyrations, with traders overwhelmed by the many headlines that followed the Federal Reserve decision and ended up signaling at least one thing: policy will remain aggressively tight — making the odds of a soft landing look elusive.
The S&P 500 extended its plunge from a January record to more than 20%. The gauge whipsawed after the Fed announcement, climbing 1.3% at one point. Two-year US yields topped 4% for the first time since 2007. Another key portion of the Treasury curve inverted, with 10-year rates exceeding those on 30-year bonds in a time-tested harbinger of a recession. The dollar rallied.
Jerome Powell vowed officials would crush inflation after lifting rates by 75 basis points for a third straight time and signaling even more aggressive hikes than investors had envisioned. He said the main message was that officials were “strongly resolved” to bring inflation down to the Fed’s 2% goal and added that “we will keep at it until the job is done.” The phrase invoked the title of former Fed chief Paul Volcker’s memoir “Keeping at It.”
Officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023, a more hawkish shift in their so-called dot plot than expected. That implies a fourth-straight 75-basis-point hike 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, talking about the forceful and rapid steps the Fed has taken, and is likely to continue taking, as it attempts to stamp out painful inflation pressures and ward off an even worse scenario later down the line,” said Seema Shah, chief global strategist at Principal Global Investors. “With the new rate projections, the Fed is engineering a hard landing — a soft landing is almost out of the question.”
More Comments:
- “We do think that markets, and consequently the economy, will become ‘Fed up’ with too much tightening, if growth (and employment) are tangibly slowing alongside of these tighter policy moves,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income.
- “Fed officials appear increasingly supportive of moving policy further into restrictive territory to prevent high inflation becoming entrenched,” wrote Gurpreet Gill, macro strategist of global fixed income at Goldman Sachs Asset Management. “Since the Second World War, 11 out of 14 Fed tightening cycles have been followed by a recession within two years.”
- “Today’s Fed action, combined with ongoing rollercoaster-like market volatility, underscore the unease of investors amid the magnified economic and market uncertainties driven by high inflation, corporate earnings warnings, geopolitical concerns and other factors weighing heavily on both Wall Street and Main Street,” said Greg Bassuk, chief executive officer at AXS Investments.
- “They have a brief window to act aggressively, and they seem eager to use it,” said Jan Szilagyi, co-founder of Toggle AI, an investment research firm.
- “The first set of Fed releases from the September meeting are unambiguously hawkish,” said Krishna Guha, vice chairman of Evercore ISI. “The macro projections signal increased risk of a harder landing.”
- “The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases,” said Greg McBride, chief financial analyst at Bankrate. “They’ve been playing catch-up ever since. And they’re not done yet.”
Key events this week:
- Bank of Japan monetary policy decision, Thursday
- The Bank of England interest rate decision, Thursday
- US Conference Board leading index, initial jobless claims, Thursday
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Here are some of the main moves in markets:
Stocks
- The S&P 500 fell 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%
Currencies
- 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
Bonds
- The yield on 10-year Treasuries declined six basis points to 3.51%
- Germany’s 10-year yield declined three basis points to 1.89%
- Britain’s 10-year yield advanced two basis points to 3.31%
Commodities
- 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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