Stocks Plunge After Fed Chair Warns of ‘Pain’
From Inflation Fight
The S&P 500 fell 3.4 percent, its worst daily
showing since mid-June, after the Federal Reserve chair spoke about the path
ahead for monetary policy.
By Joe
Rennison
Aug. 26,
2022
S&P 500
Aug. 25Aug.
264,0604,0804,1004,1204,1404,1604,180
https://www.nytimes.com/2022/08/26/business/stock-market-jerome-powell.html
Wall Street
recoiled on Friday, after the head of the Federal Reserve delivered a stern
warning that the central bank’s campaign to lower inflation by raising interest
rates is “unconditional” even if it leads to pain for households, businesses
and in turn stock prices.
The S&P
500 fell 3.4 percent, its worst daily showing since mid-June, taking its losses
for the week to 4 percent. The slump was broad, with every sector of the index
lower.
Bond
investors also quickly adjusted for more rate increases from the Fed, with the
two-year Treasury yield, which is sensitive to rising interest rates, moving
close to its highest level of the year at 3.44 percent, before easing back to
3.38 percent.
“While
higher interest rates, slower growth and softer labor market conditions will
bring down inflation, they will also bring some pain to households and
businesses,” Jerome Powell, the Fed chair, said during a speech at the Kansas
City Fed’s annual conference in Wyoming. “These are the unfortunate costs of
reducing inflation. But a failure to restore price stability would mean far
greater pain.”
The central
bank is grappling with the task of guiding the American economy out of a global
pandemic, at a time when pent-up demand, broken supply chains and soaring
energy costs have helped propel the fastest pace of price increases in a
generation. The central bank is expected to raise interest rates to their
highest level since 2008 when officials meet in September, increasing borrowing
costs for consumers and companies and cooling the economy.
Investors
had expected Mr. Powell to caution that the central bank’s task of fighting
inflation was far from complete, after a host of other Fed officials had
communicated a similar message in recent weeks. In anticipation, they pulled
nearly $1 billion from funds that invest in U.S. stocks for the week through
Wednesday, according to data from EPFR Global. Funds that buy low-rated bonds,
known as junk bonds, saw more than $4 billion of withdrawals.
Still, the
clarity of Mr. Powell’s comments on Friday removed any uncertainty about his
intentions to make economic conditions more restrictive, said Lee Ferridge,
head of macro strategy for North America at State Street Global Markets.
“This was
not the Powell we normally see where he tries to be more balanced,” Mr.
Ferridge said. “I don’t see how you could take what he said any other way.”
Such
caution reflects a marked change of sentiment on Wall Street, where trading in
July and early August had been defined by a roaring market rebound, in part
predicated on the idea that the Fed was about to start easing off its
aggressive campaign to raise interest rates. After plunging over 23 percent for
the year through mid-June, the S&P 500 rallied more than 17 percent over
the next two months.
Mr.
Powell’s remarks offered the strongest case yet that investors had gotten ahead
of themselves. Following Friday’s market moves, the index remains about 15
percent lower for the year.
“Our
responsibility to deliver price stability is unconditional,” Mr. Powell said.
Some
continue to question Mr. Powell’s conviction. The central bank has stepped in
to support financial markets on numerous occasions since the 2008 financial
crisis. Andrew Brenner, head of international fixed income at National Alliance
Securities, suggested that the Fed might come to investors’ rescue again if its
decision to maintain an extended period of higher interest rates damages the
economy.
“I continue
to not believe him,” Mr. Brenner said.
Trading in
some corners of the financial markets offered signs that Mr. Brenner is not
alone in thinking the Fed may end up easing its campaign. Investors continue to
bet on the Fed cutting interest rates next year, contrary to the central bank’s
own predictions.
Futures
prices that forecast the path of Fed interest rate increases rise through June
2023 before falling through the second half of next year. The Fed’s
policymakers' median prediction has rates remaining elevated until 2024.
Investors
took some relief from a fresh inflation report on Friday, which showed that the
pace of price increases in the United States continues to moderate, with some
investors viewing the numbers as limiting the need for further Fed action. A
second data set showed a decline in future expectations for the rate of
inflation.
Attention
will now turn to the government’s monthly update on the labor market that is
due next week, with the focus on any sign that hiring and unemployment are
worsening. So far, despite some expectations that higher borrowing costs would
eventually slow hiring, employers in the United States have continued to add
jobs, and the unemployment rate has matched its 50-year low.
“I believe
once Powell starts to see unemployment pick up, he will shy away,” Mr. Brenner
said.
The
backdrop sets up a month ahead that already sits uncomfortably in investors’
psyche. Seasonally, September is the worst month for the S&P 500, according
to the index analyst Howard Silverblatt.
“It’s a
challenging few weeks ahead,” said Mr. Ferridge of State Street Global Markets.
“The Fed has talked about causing pain, and now markets have to react. It’s
hard to make a positive case for equities after this.”
Joe
Rennison covers financial markets and trading, a beat that ranges from
chronicling the vagaries of the stock market to explaining the
often-inscrutable trading decisions of Wall Street insiders. @JARennison
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