In response to the Federal Reserve’s assertive approach this week over future rate hikes, U.S. equities sank dramatically on Friday, signaling another weekly loss for the main markets.
The S&P fell 55 points, or 1.4%, to 3,840 in the morning session. After a brief rise, the Dow Jones Industrial Average sank 430 points, or 1.3%, to 33,851, while the Nasdaq also fell 1.3%.
The Fed is decreasing the tempo of its rate hikes, but has suggested that rates will likely remain higher than anticipated over the next few years. This has disappointed investors who had anticipated recent signals of decelerating inflation would convince the Fed to ease its grip on the U.S. economy.
Mark Haefele, chief investment officer at UBS Global Wealth Management, stated in a research note: “The FOMC made clear hints on Wednesday that it does not believe it has fulfilled its aim of restoring price stability.” He said, “Thursday’s statements from a broader variety of top officials imply that other central bankers concur that additional tightening is required.”
The federal funds rate is currently between 4.25 and 4.5 percent, the highest level in 15 years. By the end of 2023, Fed policymakers anticipate that the federal funds rate will be between 5% and 5.25 percent. Their projection does not anticipate a rate drop before 2024.
Many opined that, with inflationary pressures progressively subsiding, the Fed may soon declare some progress in their fight and could even reverse direction and reduce interest rates in 2023.
“Investors can’t shake off all the hawkish language from central bankers this week, and the private sector has obviously entered a serious downturn,” said Edward Moya, senior market analyst at OANDA. “Now that [Federal Reserve Chairman Jerome] Powell has warned that we should anticipate ‘continuing rises,’ recession chances will only increase.”
Over the course of the upcoming year, several analysts foresee a rise in debate over the optimal strategy for controlling inflation.
“In terms of monetary policy, the weaker-than-anticipated CPI readings in October and November will certainly lead to a more intense debate in 2023 regarding the direction of monetary policy. However, we believe that the Fed’s focus on cooling the labor market and on core services excluding housing services will keep it on track to raise rates by 50 basis points in February and 25 basis points in March, resulting in a terminal rate between 5.0 and 5.25 percent “Analysts from Bank of America Global Research stated in a report.
Europe’s rate hikes
The most recent wave of selling occurred after central banks in Europe hiked interest rates a day after the U.S. Federal Reserve did the same, underscoring that interest rates will need to rise above what was previously anticipated to combat inflation.
As with the Fed, European central bank officials have stated that inflation is not yet under control and that further rate hikes are forthcoming. Thursday saw the European Central Bank, the Bank of England, and the Swiss National Bank all raise rates by a half-point.
Thursday at a news conference, President of the European Central Bank Christine Lagarde stated, “We are in for a long game.”
On Thursday, the S&P 500 declined 2.5%, the tech-heavy Nasdaq composite declined 3.2%, and the Dow lost 2.5%. Unless a big turnaround occurs, major indices will finish the week in the red for the second consecutive week.
In Asia, the Chinese decision to ease COVID-19 limitations has strengthened expectations for an end to major disruptions caused by lockdowns and other stringent anti-infection procedures. The likelihood that the epidemic may continue to weigh on the economy has concerned some, who are alarmed by indicators of a rapid increase in the number of cases.
“Tight financial circumstances and China’s largest COVID-19 outbreak to yet indicate that global economic growth will stall further in the first quarter of next year, driving down most commodity prices,” said Caroline Bain, chief commodities economist at Capital Economics.
“The downturn will be accompanied by risk aversion on the part of investors, which will further depress commodities prices. However, once the global economy begins to revive around the second quarter, we anticipate a rise in commodity prices due to improved demand growth and investor risk appetite “She stated,
The chair of the Federal Reserve says rate decreases are unlikely in 2023. 05:43
The inflation battle continues
While sectors of the economy, such as employment and consumer spending, remain solid, the central bank has been trying to reduce inflation. This has made it more difficult to control the rising cost of food and clothing.
The number of Americans asking for unemployment benefits decreased last week, the government announced on Thursday, indicating that the labor market remains robust. Another report indicated that November retail sales declined. This decline follows a significant increase in October.
In other trade on Friday, the price of U.S. crude oil fell $1.79 to $74.32 per barrel on the New York Mercantile Exchange. On Thursday, it fell $1.17 to $76.11 per barrel.
Brent crude, the international benchmark for price, fell $1.90 per barrel to $79.31.
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