Blue-chip stocks plunged to their lowest level since 2020 on Friday, continuing a bad slump that began in August as investors try to grapple with economic head winds in the United States and around the world that are only likely to worsen.
The Federal Reserve has pledged to get inflation back under control — even if slowing the economy means unemployment rises and households and businesses feel some pain. And although the Fed’s move to raise interest rates this week was widely expected, stock markets are feeling that pain already.
“The Fed’s continued balancing act between restoring price stability in exchange for economic pain has roiled the markets as hopes for a soft landing are quickly fading,” said Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management. “Monetary policy is a blunt instrument, and investors are rightly concerned that the Fed may go too far too quickly before it is able to accurately assess the effects of its policy on the economy.”
The bad market news — and the Fed’s forecast of a sharply slowing economy — could also affect campaigns for this fall’s midterm elections in Congress, where Republicans have been hoping that voters will blame President Biden and Democrats for high inflation. Inflation has become a somewhat less salient issue among voters, as people say they’re feeling better about the economy and getting some breathing room thanks to falling gas prices. But turmoil in the markets could become a hot topic on the trail.
The full weight of the Fed’s actions since March — pushing a key interest rate up by three percentage points already, with more increases still to come — may not be felt until later this year or next. But financial markets are taking in the central bank’s promise and sending alarms back out, making clear that no matter how many times Fed officials say they’re going to do whatever they can to crush inflation, the idea still roils Wall Street.
“I believe it’s probably going to get worse before it gets better,” said Dan Ives, managing director and senior equity research analyst at Wedbush Securities.
Analysts say the drop is not only about the Fed’s moves so far, but also about further tightening ahead and the growing likelihood that the Fed cannot get inflation down without causing a recession. That kind of downturn could quickly ricochet down to corporate profits, too.
“A soft landing would be very challenging, and we don’t know — no one knows — whether this process will lead to a recession or if so, how significant that recession would be,” Fed Chair Jerome H. Powell said Wednesday, after the Fed’s rate announcement.
The central bank is rushing to cool the economy and get consumer prices down. Officials are not seeing enough progress yet. But the market jitters reflect a domestic and global economy already headed for a slowdown.
Oil prices fell to the lowest levels since January. The S&P energy sector closed down 6.75 percent.
Shares in large tech firms including Apple, Amazon, Microsoft and Meta Platforms fell Friday. (Amazon founder Jeff Bezos owns The Washington Post.) Goldman Sachs cut its year-end S&P 500 forecast, driven largely by climbing interest rates. On the flip side, bond yields rose this week after the Fed’s latest rate hike, and the two-year and 10-year Treasury rates hit highs unseen for more than a decade.
Major market indexes are down significantly for the year so far, though the long bull market that lasted until recently means they’re still up more than 30 percent over the last five years.
Bad economic news could become a political issue. House Minority Leader Kevin McCarthy (R-Calif.), announcing the GOP’s official campaign agenda on Friday, touched on the topic: “We want an economy that is strong. That means you can fill up your tank. You can buy the groceries. You have enough money left over to go to Disneyland and save for a future — that the paychecks grow, they no longer shrink.”
The brutal close to the week came after the Fed raised rates yet again by three-quarters of a percentage point, its third such move and fifth hike of the year in its fight against inflation. Wednesday’s increase would have been considered outlandishly large until recently. But Fed officials want to push rates past the “neutral” zone of roughly 2.5 percent, where rates neither slow nor juice the economy, and into “restrictive territory” that dampens consumer demand.
The Fed’s benchmark interest rate now sits between 3 percent and 3.25 percent, and officials expect it to cross 4 percent by the end of the year, well into what is considered restrictive.
That rate does not directly control rates for mortgages and other loans. But it influences how much banks and other financial institutions pay to borrow, which helps drive loan pricing more broadly. And crucially, the Fed’s own communications — be it remarks from Fed officials or policymakers’ economic projections — are key to shaping financial conditions and getting the markets to start pricing in rate hikes that are still to come.
Monetary policy famously operates with a lag, and the Fed’s rate hikes so far haven’t led to meaningfully lower inflation yet. But the moves are showing up in the economy in other ways.
“Financial conditions have usually been affected well before we actually announce our decisions,” Powell said this week. “Then changes in financial conditions begin to affect economic activity fairly quickly, within a few months. But it’s likely to take some time to see the full effects of changing financial conditions on inflation.”
Diane Swonk, chief economist at KPMG, said traders are also jittery about how the Fed’s moves will be magnified as other central banks also ramp up their fights against inflation. The Fed was among a slate of global central banks to raise rates this week — the Bank of England raised its rate by a half a percentage point Thursday, for instance, and warned that Britain may already be in a recession. The fear is that many nations’ economies won’t be able to withstand an extreme slowdown. The Fed’s rate hikes also mean bigger debt burdens for poor countries.
European stocks also fell sharply Friday, in part after Britain announced a sweeping series of tax cuts to cushion against a recession.
Economists and traders fear that as policymakers all take big swings at once, they risk overdoing it, not just for their own economies but for the globe.
“Synchronous, not synchronized,” Swonk said of the back-to-back moves from various central banks. “This wasn’t planned.”