MANHATTAN (CN) — The rout on Wall Street continued this week as the Federal Reserve’s further hawkishness has investors worried the central bank has no plans to back off its rate hikes.
By the week’s end, already rattled equities markets hit new lows for the year. The Dow Jones Industrial Average now sits under the 30,000-point mark, losing 1,225 points this week to settle at 29,597 points. The S&P 500 and Nasdaq lost 180 points and 581points for the week, respectively.
The Fed was the main culprit for the rout this week. On Wednesday, the central bank again hiked interest rates by 0.75% — the third time it has done so this year — to bring the federal funds rate into the 3% to 3.25%. The central bank now predicts that rate will hit 4.4% by the end of 2022, which hints at another 75-basis-point-rate hike during its next meeting in November. The Fed also reduced its growth forecasts for the following year.
Many experts considered the accompanying statement by the Federal Open Markets Committee to be a dud that contained little news — once again it mentioned Russia’s war against Ukraine, elevated inflation, and a robust job market — but it did also say that “recent indicators point to modest growth and production.”
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Fed Chair Jerome Powell told reporters after the central bank announced its rate hike. “That’s going to depend on how quickly wage and price inflation pressures come down, whether expectations remain anchored, and also do we get more labor supply.”
Powell also noted that “shelter inflation” would remain high for some time. He also said that commodity prices have come down and there has been “some supply side healing” but that overall price increases have not come down as expected.
“The market is finally taking the Fed at their word — they are going to cause a recession in order to fight inflation,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “This is bad news for financial markets and worse news for workers and the economy.”
Many analysts had originally predicted the Fed would raise rates by only an additional 0.25% by the end of the year, but now that forecast looks hazy.
“The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer,” Powell said during the press conference. “Nonetheless, we’re committed to getting inflation down to 2% because we think that a failure to restore price stability would mean far greater pain later on.”
In the Fed’s economic projections, which includes the so-called “dot plot” of where FOMC participants believe the target level of the federal funds rate will hit, the Fed nudged its expectations upward. Instead of the 3.4% median rate participants forecast at the last meeting in June, the dot plot now has a median estimate of a 4.4% rate by year-end.
If the Fed were to hold to the current forecast, that would mean another 75-basis-point rate hike plus another 0.5%, unlike the 0.25% analysts had hoped for.
“It will be really important to see if Powell blesses the dots and another 75bp in November,” Peter Boockvar, chief investment officer at Bleakley Financial Group, wrote. “Either way, the Fed has now entered the ‘Danger Zone’ in terms of the rate shock they are throwing onto the U.S. economy.”
Several other central banks worldwide also this week have attempted to curb inflation, from Norway to South Africa. The Bank of England raised its rates by 50 basis points, which was expected, though the Bank of Japan did not move the needle on its rates, despite inflation in that country.
One side effect of the Fed’s tightening has been the effect on the housing market, which by all accounts has entered a recession, and some believe the market has further to fall in 2022 before it hits a bottom.
Earlier in the week, builder sentiment fell once again, with the National Association of Home Builders’ index dropping another three points to hit 46, the lowest point since the early days of the Covid-19 pandemic. The index has now fallen during each month of the year.
“Buyer traffic is weak in many markets as consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households,” Jerry Konter, the association’s chairman, said in a statement. “In another indicator of a weakening market, 24% of builders reported reduced home prices, up from 19% last month.”
As a result of this and other indicators, some analysts say a recession will surely come, while others are holding onto hope that such a fate is not inevitable. “We continue to believe the global economy will narrowly avoid a recession, despite expecting the U.S., Canada, and most of Europe to fall into recession at some point over the next year or so,” wrote Ben May, director of global macro research at Oxford Economics.
May noted that all five technical recessions in the United States since 1980 have coincided with a global recession, but that the “peak to trough” fall in the U.S. gross domestic product will be far smaller than in previous recessions. “However, it wouldn’t take much additional advanced economy weakness to mechanically push the world into recession,” he wrote.
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