Wall Street plummets after Fed chair warns of ‘pain’ from inflation struggle

This caution reflects a sharp shift in sentiment on Wall Street, where trading in July and early August was marked by a strong market rally, fueled in part by the notion that the Fed was on the verge of easing its aggressive rate-hike campaign. After falling more than 23 percent for the year through mid-June, the S&P 500 gained more than 17 percent over the next two months.

Powell’s comments provided the strongest argument yet that investors had outpaced themselves. After Friday’s market moves, the index remains about 15 percent lower for the year.

“Our responsibility for price stability is unconditional,” Powell said.

Some continue to question Powell’s conviction. The central bank has stepped in to support financial markets on numerous occasions since the 2008 financial crisis. Andrew Brenner, head of international fixed income at National Alliance Securities, suggested the Fed could again come to the rescue of investors if its decision to maintain an extended period of higher interest rates hurts the economy.

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“I still don’t believe him,” said Brenner.

Trading in some corners of the financial markets offered signs that Brenner is not the only one who thinks the Fed may be easing its campaign. Investors continue to bet on the Fed cutting rates next year, contrary to the central bank’s own predictions.

Futures prices, which predict the path of Fed rate hikes, rise through June before falling in the second half of next year. Fed policymakers’ median forecast is for interest rates to remain elevated through 2024.

Investors took some relief from a new inflation report on Friday that showed the pace of inflation in the United States continues to moderate, with some investors taking the numbers as limiting the need for further Fed action. A second set of data showed a decline in future expectations for the inflation rate.

Attention will now turn to the government’s monthly job market update due next week, with a focus on any signs of deteriorating hiring and unemployment. So far, despite some expectations that higher borrowing costs would ultimately slow hiring, employers in the United States have continued to create jobs and the unemployment rate has hit a 50-year low.

“I think once Powell starts to see an increase in unemployment, he’ll recoil,” Brenner said.

The background for a month ahead is already uncomfortably embedded in the psyche of investors. Seasonally, September is the worst month for the S&P 500, according to index analyst Howard Silverblatt.

“We have a challenging couple of weeks ahead of us,” Ferrige said. “The Fed has talked about causing pain and now the markets need to react. After that, it’s difficult to make a positive case for equities.”

https://www.smh.com.au/business/markets/wall-street-plunges-after-fed-chair-warns-of-pain-from-inflation-fight-20220827-p5bd73.html?ref=rss&utm_medium=rss&utm_source=rss_business Wall Street plummets after Fed chair warns of ‘pain’ from inflation struggle

Brian Lowry

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