The Dow Tumbled 500 Points Because Jerome Powell’s Fed “Won’t Blink”

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

See: The Fed approves the third major interest rate hike and reports others before the end of the year

Central bankers also predicted a rate hike of another 125 basis points 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 rate. “terminal” – or peak – at 4.6% in 2023. They do not expect rate cuts until 2024.

Analysts said Powell’s projections and comments brought home 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 to tighten until inflation is under control.

“He’s clearly intent on showing the market that he means what he says, that he won’t blink,” said Mel Casey, senior portfolio manager at FBB Capital Partners, in a telephone interview. “He won’t care what the market does. For too long, people have assumed that even that was a concern, but the concern here is inflation. ”

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

The Dow Jones Industrial Average DJIA,
-1.70%
it fell by over 500 points, or 1.7%, to close at 30,183.78. The S&P 500 SPX,
-1.71%
fell by 1.7%, to 3,789.93. The Nasdaq Composite COMP,
-1.79%
it fell 1.8%, closing at 11,220.19.

“We will continue until the work is done,” Powell said at a press conference following the release of the Fed policy statement and economic projections. “I wish there was a painless way to do it. There is not.

The August Consumer Price Index report released earlier this month found that inflation has spread more widely in the economy, with the year-on-year rate slowing less than expected at 8 , 3%. In his Jackson Hole speech, Powell warned that the economy and family would experience “some pain” from the bank’s more aggressive effort to reduce inflation.

“I believe 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 from the meeting is that they have postponed the time when inflation is about to peak, so everything has been prolonged.”

Casey of FBB compared investor reactions to the five stages of grief: rejection, anger, bargaining, depression, and acceptance.

“We are trying to gain acceptance,” he said, following bouts of “hope” that emerged during market rebounds earlier this year, particularly when the S&P 500 gained about 17% from its June low earlier. of Powell’s Jackson Hole speech.

Laws: The Fed expects a sharp economic slowdown and rising unemployment as it fights inflation

“Nobody knows if this process will lead to a recession or, if so, how significant that recession would be,” Powell said in the press conference. “It will depend on how quickly inflationary pressures on wages and prices decrease, if expectations remain anchored and even if we have more labor supply.”

He added that the chances of a soft landing will diminish if policy is to become more restrictive for the Fed to hit its 2% inflation target.

See: World’s largest wealth manager sees “no goldilocks scenario” as central banks grapple with inflation and growth

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

“We’ve had a lot of rate hikes and we’ve done very fast in the last three fights,” he said. “We have yet to really see something in the numbers. That gain has yet to be respected. ”

Trading on other financial markets was unstable after the release of the data. The 2-year Treasury yield TMUBMUSD02Y,
4.096%
it has risen to its highest level since October 2007, according to Dow Jones Market Data. The 10-year Treasury yield TMUBMUSD10Y,
3.548%
it was 3.511%, down 5 basis points.

Gold with delivery in December GCZ22,
-0.38%

GC00,
-0.38%
it was up $ 4.60, or 0.3%, to come in at $ 1,675.70 an ounce on Comex. The ICE US dollar DXY index,
+ 0.89%,
an indicator of the dollar’s strength against a basket of rival currencies, advanced 1%, after Russian President Vladimir Putin ordered reservists to mobilize and made remarks seen as a threat to the use of nuclear weapons, while escalating the war in Ukraine.

See: The Fed’s Tough Task: History Shows Inflation Takes An Average 10 Years To Return To 2%

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