Can the Fed tame inflation without undermining the stock market? What’s next for investors?

The Federal Reserve isn’t trying to hurt the stock market as it raises interest rates faster in an effort to slow inflation — but investors should be prepared for more pain and volatility as policymakers can’t be cured. By doing a deep selloff, there are investors and strategies.

I don’t think they’re trying to bring down inflation by driving down stock prices or bond prices, but it’s having that effect. Tim Courtney, chief investment officer at Exencial Wealth Advisors, said in an interview.

U.S. stocks fell sharply last week after a warmer-than-expected inflation rate in August dashed hopes of a slowdown. The data bolstered expectations among traders of federal funds futures for an increase of at least 75 basis points when the Fed concludes its policy meeting on September 21, with some traders and analysts looking for an increase of 100 basis points or a full percentage point. Point.

Preview: The Fed is ready to tell us how much ‘pain’ the economy will suffer. Still, it doesn’t signal a recession.

The Dow Jones Industrial Average DJIA;
The S&P 500 SPX posted a weekly decline of 4.1%.
4.8% and the Nasdaq Composite COMP was down;
It showed a 5.5% decrease. The S&P 500 ended Friday below the 3,900 level, seen as an important technical support area, with some chart watchers looking at the possibility of testing the 2022 large-cap benchmark low at 3,666.77 on June 16.

watch out As the S&P 500 fell below 3,900, the stock market bears dominated

From global shipping giant and economic bellwether FedEx Corp. FDX Profit Alert,
It fueled fears of a deep recession, contributing to stock-market losses on Friday.

Read: Why FedEx’s stock crash is so bad for the entire stock market.

Treasuries also fell, with the 2-year Treasury note TMUBMUSD02Y;
With rates rising above a near 15-year high of 3.85%, the Fed will continue to rate higher in the coming months. When prices fall, yields rise.

Investors are widely seen shrugging off the proverbial “Fed put put” on the stock market in an environment where the central bank’s stubborn interest in controlling inflation is widely seen.

The concept of a Fed has been around since at least October 1987, when the stock market crash prompted Alan Greenspan’s central bank to cut interest rates. A real option is a financial derivative that gives the holder the right, but not the obligation, to sell the underlying asset at a certain level, acting as an insurance policy against a market downturn known as the strike price.

Some economists and analysts have suggested the Fed should welcome or plan market losses, which could tighten financial conditions as investors cut spending.

Related: Will higher stock prices make it harder for the Fed to fight inflation? The short answer is ‘yes’

William Dudley, the former president of the New York Fed, argued earlier this year that the central bank would not be able to control inflation near 40-year highs unless it made investors suffer. “It’s hard to know how much the Federal Reserve should do to control inflation,” Dudley wrote in a Bloomberg column in April. But one thing is certain: to be successful, he will have to inflict more losses on stock and bond investors than he has ever experienced.

Some market participants are unsure. Aophin Davitt, Moneta’s Chief Investment Officer; The Fed has described stock market volatility as a result of its efforts to tighten monetary policy, not as an objective.

“I understand that stocks can be collateral damage in a consolidation cycle,” but stocks “don’t necessarily have to crash,” said Devitt.

But she said she is prepared to see markets fall and the economy slow or even enter recession as the Fed focuses on tackling inflation.

Latest: The Fed’s Powell said lowering inflation would hurt families and businesses in a speech in Jackson Hole.

Between 2008 and 2015, the Federal Reserve maintained its target rate of interest rates in the range of 0% to 0.25% in response to the financial crisis and its aftermath. The Fed cut rates to near zero again in March 2020 in response to the Covid-19 pandemic. From rock-bottom interest rates, the Dow DJIA;
Skyrocketing more than 40%, the large-cap index S&P 500 SPX;
It jumped more than 60 percent between March 2020 and December 2021, according to Dow Jones market data.

Investors are getting used to the “tailwinds of more than a decade of lowering interest rates,” Courtney said at Exxonential Wealth Advisors.

“I think the Fed’s message (right now) 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 greenhouses, the temperature has to be kept at a certain level throughout the day and night, and I think that’s the message to the market. They can and should grow on their own without the greenhouse effect.

watch out Comment: The trend of the stock market is persistently bearish, especially after the big daily decline this week

Meanwhile, the Fed’s hawkish stance means investors should be prepared for “a few more daily stabs to the downside” that could eventually be the “last big outflow,” Liz Young, head of investment strategy at Sophie, said in a Thursday note.

“This may sound strange, but if that happens so quickly, in the next couple of months, that’s really going to be a bull case in my view,” she said. “It’s likely to be a quick and painful drop, with renewed activity over the course of the year likely to be more sustained, as inflation continues to decline further.”

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