Fed, Wall Street 'in a brawl' over inflation cure
The
Stocks capped a steep two-day sell-off on Friday, wiping out gains from a rally earlier in the week driven by hopeful economic news. Inflation as measured by the consumer price index had fallen for the fifth straight month — and far more than analysts expected — according to data released right before the Fed was set to slow down its interest rate hikes.
While the Fed did end up boosting rates by a smaller amount than its previous four hikes, a dour forecast from officials, including Chairman
The Dow Jones Industrial Average closed down 281 points Friday, falling 0.9 percent on the day for its second straight week of losses. The S&P 500 index closed 1.1 percent lower, and the Nasdaq closed with a loss of 1 percent on the day, respectively.
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"The stock market's been itching for a pivot for months now, really since the summer, and the Fed time and time again has told us that they're serious about inflation, they want to get inflation under control, and if that means keeping rates high for a while, so be it," she added.
As interest rates continue to rise, businesses will face steeper borrowing costs and have less money to invest in expansion, making their stocks less appealing to investors. Households will also have less expendable income to throw in the market as interest rates on their mortgages, car payments and credit cards rise.
The stock market's hardship, however, is an important part of the Fed's plan.
Fed officials know their tough talk about keeping rates high and snuffing out inflation at whatever the cost alarms investors and traders. Those warnings are intended to keep Americans' expectations in check and force businesses to feel the squeeze of high rates without rising stock prices to buffet the blow.
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Powell said during a Wednesday press conference that the
The November jobless rate of 3.7 percent is just 0.2 percentage point below its level in
With fewer workers available to fill open jobs, businesses have been forced to boost wages to attract candidates — and prices to compensate for that higher pay. That dynamic, Fed officials say, is the reason why inflation has remained high even as prices for almost all goods other than food have fallen.
"We have too many jobs and too few workers, so that means that wage inflation is going to be far from a sustainable average, and we're going to have that passing through to prices. That's what we're working on right now," said
"To be honest with you, I don't quite know why markets are so optimistic about inflation," Daly said.
On Wednesday, Fed officials boosted their projections for how high they would need to raise interest rates and how long they would keep them at levels meant to hinder the labor market.
They now expect to hike interest rates to a span of 5 to 5.25 percent by the end of 2023, up from the 4.5 to 4.75 range officials projected in September, and they don't foresee cutting rates until 2024.
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A Fed-driven recession or steep slowdown would be more bad news for the stock market as companies struggle with lower sales and fewer households have the flexibility to put money in risky assets. But higher rates in and of themselves could be a larger and longer-term damper on the stock market.
Stocks exploded in value in the years following the Great Recession as the Fed kept its baseline interest rate range near zero. The market's stunning rally accelerated even more during the COVID-19 pandemic, when low interest rates and trillions of dollars in federal stimulus helped fuel new records across all three major indexes.
With rates likely to stay high for much longer, Cox said the days of the market smashing through record highs again are likely far away.
"When we look at 2023, we kind of see a year of purgatory," she said.
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