Rising Economic Fear Batters Wall Street
But in April, Fed officials began to shift their view, expressed in speeches and other public comments, on how quickly interest rates will have to rise to get inflation under control, and Wall Street’s economic projections shifted too. In the futures market, where traders bet on how high interest rates could go, the predominant view now is that the Fed’s benchmark rate will climb to around 2 percent by July — something that seemed unimaginable even a month ago.
For that to happen, the central bank would have to raise its policy rate by half a percentage point at each of its next three meetings, and the fear is that such aggressive increases will trigger an economic slump, rather than just cooling things down enough to slow inflation but keep the economy growing.
“Every time the Fed has spoken, markets have taken it fairly negatively,” said Saira Malik, chief investment officer at Nuveen, a global investment manager. “Investors are concerned that with these multiple rate hikes, the Fed is going to cause a recession rather than a soft landing.”
Higher interest rates will hit consumer demand. Mortgage rates, for example, have already jumped to above 5 percent from 3.2 percent at the start of the year, eating up new home buyers’ budgets. Other borrowing costs, everything from consumer loans to corporate debt, will rise as the Fed pushes its benchmark rate higher.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Economists are wondering how long this will continue.
“There’s going to be a natural slowdown in spending, maybe before interest rates increase, as costs increase,” said Jean Boivin, head of the BlackRock Investment Institute. “The central bank will need to monitor that very carefully because, if it happens naturally and then you add interest rate increases, this is how you get to a recession scenario.”
Broadly speaking, earnings reports this week have shows that profit growth continues. About 80 percent of companies in the S&P 500 to report results through Thursday have done better than expected, data from FactSet shows.
But other companies have only added to the downdraft. Netflix plunged after it said last week it expected to lose subscribers — 200,000 in the first three months of the year, and an additional two million in the current quarter. The stock is down more than 46 percent for the month.
On Friday, Amazon slid 12 percent one day after the e-commerce giant reported its first quarterly loss since 2015, citing rising fuel and labor costs and warning that sales would slow. Its shares are down 22 percent this month.
General Electric on Tuesday warned that the economic fallout from Russia’s invasion of Ukraine would weigh on its results. Its shares fell 10 percent that day and are down about 16 percent for the month.