Can the Fed tame inflation without further crushing the stock market? What investors need to know.

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The Federal Reserve isn’t trying to shut down the stock market as it sharply raises interest rates in its bid to slow inflation — but investors need to be prepared for more pain and volatility as policymakers fear. Not from a deep sell-off, investors and strategists said.

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“I don’t think they are trying to reduce inflation by destroying stock prices or bond prices, but it is having an effect.” Tim Courtney, chief investment officer at Accentual Wealth Advisors, said in an interview.

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US stocks fell sharply last week after expectations of a clear cooling in inflation were warmer than expected in August. The data cemented expectations among fed-funds futures traders for an increase of at least 75 basis points when the Fed ends its policy meeting on Sept. 21, with some traders and analysts looking for an increase of 100 basis points, or the full percentage. Of. point.

Preview: The Fed is ready to tell us how much ‘pain’ the economy will suffer. However, it still won’t indicate bearishness.

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Dow Jones Industrial Average DJIA,
recorded a weekly decline of 4.1%, while the S&P 500 SPX,
Dropped 4.8% and Nasdaq Composite Comp,
suffered a decline of 5.5%. The S&P 500 ended Friday below the 3,900 level seen as a key area of ​​technical support, with some chart watchers looking to test the large-cap benchmark’s 2022 low of 3,666.77 set on June 16. Look at

Stock market bears lost 3,900 of the S&P 500. retained the upper hand as below

Global shipping giant and economic bellwether FedEx Corp. Profit warnings from FDX,
Fears of a recession further increased as the stock market contributed to losses on Friday.

Why FedEx stock is so bad for the entire stock market

The Treasury also fell along with the yield on the 2-year Treasury note TMUBMUSD02Y,
At a nearly 15-year high above 3.85% as expected, the Fed will continue to raise rates further in the coming months. Yields increase with fall in prices.

Investors are operating in an environment where central banks need to rein in stubborn inflation, which widely dispels the notion of a figurative “Fed put” on the stock market.

The concept of a fed put has been around since at least the stock-market crash of October 1987, which prompted the central bank led by Alan Greenspan to lower interest rates. An actual put option is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a specified level, known as the strike price, as an insurance policy against market downturns. works.

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 reduce expenses.

Do higher stock prices make it harder for the Fed to fight inflation? The short answer is yes’

Former New York Fed chairman William Dudley argued earlier this year that central banks would not get control of inflation that is running near 40-year highs unless they plagued investors. “It’s hard to know how much the Federal Reserve will need 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 incur more losses to stock and bond investors than ever before.”

Some market participants are not convinced. Aofin DeWitt, Chief Investment Officer at Moneta, The Fed sees stock market volatility as a potentially byproduct of its efforts to tighten monetary policy, and not as an objective.

“They recognize that a tight cycle could result in stock collateral damage,” but that doesn’t mean the shares “will fall,” DeWitt said.

However, the Fed is prepared to endure market downturns and the economy to slow and even slide into recession as it focuses on overcoming inflation, she said.

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

The Federal Reserve kept the fed funds target rate in the range of 0% to 0.25% between 2008 and 2015, as it dealt with the financial crisis and beyond. The Fed also cut rates again to near zero in March 2020 in response to the COVID-19 pandemic. With rock-bottom interest rates, the Dow DJIA,
skyrocketed over 40%, while the large-cap index S&P 500 SPX,
The Dow Jones jumped over 60% between March 2020 and December 2021, according to market data.

Courtney at Accentual Wealth Advisors said investors have gotten used to the “tailwind of more than a decade with falling interest rates” while looking for the Fed to step in with its “puts.”

“I think (now) the Fed message is ‘you’re not going to get this tailwind anymore’,” Courtney told MarketWatch on Thursday. “I think markets can grow, but they have to grow on their own because markets are like a greenhouse where the temperature has to be kept at a certain level all day and all night, and I think that’s the message that markets can and should grow on its own without the greenhouse effect.”

Opinion: The stock market continues to be bearish, especially after this week’s big daily drop

Meanwhile, the Fed’s aggressive stance means investors should be prepared for “a few more daily stabs downwards” that could ultimately prove to be “the last big flush,” Liz Young, head of investment strategy at SoFi, said Thursday. . Comment.

“It may sound strange, but if it happens rapidly, i.e. over the next few months, it really becomes a bull case in my view,” she said. “This could be a quick and painful decline, resulting in a more sustainable move later in the year, as inflation falls more significantly.”

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