Stock markets falter in the face of the Fed’s determination to curb inflation – La Tribune.fr

Investors were hesitant on Wall Street. But, at the closing bell on Wednesday, the sanction fell: the main American stock market indices ended sharply lower, from 1.7% for the Dow Jones to 1.79% for the Nasdaq, after the decision of the central bank American (Fed) to raise its key rates by 75 basis points, or now in a range between 3% and 3.25%. The Federal Reserve had never tightened its monetary policy so quickly since the 1980s under the presidency of the very monetarist Paul Volker. The stock market is still in a bad direction on Thursday and the European indices are frankly in negative territory. In Paris, the CAC 40 even slips towards 5,900 points. This increase of 75 basis points is however not a surprise: it was anticipated by more than 80% by the market, according to the FedWatch index. But the strong rhetoric from Fed Chairman Jerome Powell left the door wide open for further hikes at the next two monetary policy committee meetings in November and December. Central bankers are indeed forecasting a hike of at least 125 basis points, which would take the median key rate to 4.4% and the “terminal rate” – or peak – to 4.6% in 2023. And it does not we must not wait for a rate cut before… 2024. The illusion, cherished for a moment after the previous 75 basis point hike in July, of a pause in monetary tightening, has indeed completely dissipated. Raising rates to curb inflation “will not be painless”, warns Fed chief Jerome Powell Until the job is done Jerome Powell’s comments are thus in line with those of Jackson Hole (where the Fed hosts an annual conference with the banks): priority given to the fight against inflation at the risk of causing a hard landing for the American economy, or even a recession. The word is firm and it no longer deviates from the objective of bringing inflation back to around 2% (against 8.3% in August). “Since Jackson Hole, the market has understood that the Fed will have to keep rates high for a while to have an effect on inflation that has become structural,” a bond manager told us before Wednesday’s meeting. “We will continue until the job is done,” said Jerome Powell in particular on Wednesday, without giving any details on the time it will take to curb inflation. All eyes are now riveted on the employment figures in the United States, which have become the barometer for testing the aggressiveness of the Fed’s monetary policy. One thing is now certain, investors can no longer rely on central bank support, as they have been accustomed to since the 2008 financial crisis. It is this paradigm shift that is driving markets, stocks and bonds, down. After a certain denial, investors are brought back – brutally – to the principle of reality, that of a long period with high rates. The rise leads to the fall This is why, this time around, the rate hike in September was not greeted, as before, by a rebound in equities. At each previous rate hike in the United States (March 16, May 4, June 15 and July 27), the S&P index had indeed risen by 0.56%, 2.2%, 3% and 2.6% respectively. %. Admittedly, these rebounds quickly appeared to be short-lived, except perhaps in July, and the S&P index has posted a drop of 20% since the start of the year. What qualifies the market as bearish. “No one knows whether the process (of raising rates, editor’s note) will or will not lead to a recession”, underlined Jerome Powell, for whom it will “depend on the speed with which inflationary pressures on wages and prices go lessen “. Leaving little hope for a soft landing for the economy. And yet the stock market still believes in it! In the meantime, the markets should continue their gentle slide, even if more and more voices on Wall Street believe that most of the decline is now done. The market needs time to digest this new context but the fall in valuations, on equities as well as on bonds, can provide new buying opportunities. The Fed draws its fifth rate hike of the year to curb inflation (and counting)