The Dow Jones dropped 500 points because Jerome Powell's Fed "won't blink"

The Dow Jones dropped 500 points because Jerome Powell’s Fed “won’t blink”

Stock market investors took a while to make up their minds, but when the closing bell rang on Wednesday, it was clear they didn’t like what they had heard from the Federal Reserve and its Chairman Jerome Powell.

Watch: The Fed approves the third major interest rate hike and points to more before the end of the year

Central bankers also booked another 125 basis points in rate hikes by the end of the year, which would bring the benchmark interest rate to a midpoint of 4.4% by the end of the year, plus a “terminal” — or peak — rate. — 4.6% in 2023. They don’t expect any rate cuts until 2024.

Analysts said the projections and Powell’s comments conveyed the same message the Fed chairman delivered in a speech at a monetary policy symposium in Jackson Hole, Wyoming, in late August: the Fed intends to continue tightening. to control inflation.

“Clearly he intends to show the market that he means what he says, that he is not going to blink,” Mel Casey, senior portfolio manager at FBB Capital Partners, said in a phone interview. “He is not going to worry about what the market does. For too long, people have seen that as a concern, too, but the concern here is inflation.”

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

The Dow Jones Industrial Average DJIA,
-1.70%
booked a drop of more than 500 points, or 1.7%, to finish at 30,183.78. The S&P 500SPX,
-1.71%
it fell 1.7% to 3,789.93. The Nasdaq Composite COMP,
-1.79%
fell 1.8%, ending at 11,220.19.

“We’ll keep it up until we get the job done,” Powell said at a news conference after the release of the Fed’s policy statement and economic projections. “I wish there was a painless way to do it. There isn’t.

The August Consumer Price Index report released earlier this month found that inflation had spread more widely through the economy, with the year-on-year rate slowing less than expected to 8.3%. In his Jackson Hole speech, Powell warned that the economy and households would experience “some pain” as a result of the bank’s more aggressive effort to reduce inflation.

“I think they are doing what needs to be done,” said Guido Petrelli, founder and CEO of Merlin Investor. “What I don’t see as a good sign of the meeting is that they postponed the moment when inflation is going to peak, so everything has been prolonged.”

FBB’s Casey compared investor reaction to the five stages of grief: denial, anger, bargaining, depression and acceptance.

“We’re trying to get to acceptance,” he said, after episodes of “hope” that emerged during market rebounds earlier this year, particularly when the S&P 500 rallied about 17% from its June low before the Powell’s speech at Jackson Hole.

Read: The Fed predicts a big slowdown in the economy and a rise in unemployment as it battles inflation

“No one knows if this process will lead to a recession or, if so, how significant that recession would be,” Powell said at the news conference. “That will depend on how quickly inflationary pressures on wages and prices drop, whether expectations remain anchored and also whether we have more labor supply.”

He added that the chances of a soft landing will diminish if policy has to tighten for the Fed to hit its 2% inflation target.

Watch: World’s largest asset manager doesn’t see ‘a Goldilocks scenario ahead’ as central banks grapple with inflation and growth

But according to Casey, the chances of a soft landing are getting slimmer because the CPI numbers have been “stubborn and sticky”.

“We had a lot of rate increases and we’ve done it very quickly in the last three meetings,” he said. “We have yet to really see anything show up in the numbers yet. That payment has yet to be observed.”

Trading in other financial markets was choppy after the data release. The 2-year Treasury yield TMUBMUSD02Y,
4.122%
rose to the highest level since October 2007, according to Dow Jones Market Data. The 10-year Treasury yield TMUBMUSD10Y,
3,548%
was 3.511%, down 5 basis points.

Gold for delivery in December GCZ22,
-0.41%

GC00,
-0.41%
it rose $4.60, or 0.3%, to settle at $1,675.70 an ounce on Comex. The ICE US Dollar Index DXY,
+0.83%,
A gauge of the dollar’s strength against a basket of rival currencies, rose 1%, after Russian President Vladimir Putin ordered reservists to mobilize and made comments seen as threatening to use nuclear weapons. as the war in Ukraine intensified.

Watch: The difficult task of the Fed: history shows that it takes an average of 10 years for inflation to return to 2%

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