Stock slump likely will not prevent half-point rate hike
Don’t count on Federal Reserve Chair Jerome Powell to ride to the rescue of a faltering stock market — at least not yet.
Kansas City Fed President Esther George said Thursday that the market rout was no surprise in light of the central bank’s repeated caution that it will continue raising interest rates to cool the hottest inflation in decades. While she acknowledged equities were having a “rough” week, her remarks in a CNBC interview did nothing to soften the tone set by Powell on Tuesday, who warned that officials seek “clear and convincing” evidence that price pressures are retreating.
That’s not encouraging for investors betting on the imminent exercise of a “Fed put,” in which the central bank alters policy to prop up equity markets after a sharp decline.
The Fed raised interest rates by 50 basis points earlier this month and Powell indicated it was on track to make similar-sized moves at its meetings in June and July, as well as start reducing the central bank’s bloated balance sheet. But in the months ahead, signs of a slowing economy and reduced price pressures would set the stage for a debate at the Federal Open Market Committee’s Sept. 20-21 meeting on easing back to quarter-point hikes.
“The tightening in financial conditions is an intended consequence of Fed hikes and QT,” or quantitative tightening, said Priya Misra, global head of rates strategy at TD Securities. “They want to slow down aggregate demand and financial conditions need to tighten to do that.”
The S&P 500 suffered its worst selloff since June 2020 on Wednesday as investors assessed the impact of higher prices on earnings, following disappointments by retailers Walmart Inc. and Target Corp.. This week’s slide extended the year-to-date decline to about 18%. The tech-heavy Nasdaq index is down 27%.
While his remarks were before the latest slide, Powell didn’t sound perturbed by the weakness seen since January.
“Obviously there are some volatile days in the market,” Powell said Tuesday in a Wall Street Journal-moderated event, explaining he was pleased markets have priced in future Fed hikes. “It has been good to see financial markets reacting in advance based on the way we were speaking about the economy and the consequences. Financial conditions overall have tightened significantly. I think you are seeing that. That is what we need.”
“What we have seen so far remains consistent with the Fed’s objectives in terms of tightening financial conditions to slow growth and realign demand with depressed supply,” said Robert Dent, a Nomura Securities economist. “The market is beginning to come to terms with a Fed that is determined to bring inflation lower at all costs.”
The stock market isn’t the only goal of Fed tightening.
Higher rates for home mortgages and vehicles reduces demand in those markets, where supplies have been short and a stronger dollar has the effect of cutting export demand and trimming import prices.