If inflation continues to be stubborn, investors believe that the Federal Reserve may have to raise interest rates higher than they have in the past 20 years. Some Wall Street professionals believe that the Fed’s rate increases have already had a cooling effect on the economy. A rather positive job market news reported last week caught a lot of investors by surprise.
So far this year, inflation and employment have been rising. This portrays the economy’s refusal to regain composure as efficiently as the Fed would want to. More traders believe the sustained above-target inflation will stick around for a while. A rising number of traders are seriously questioning whether the central bank’s target rate will reach a high of 6% (not reached since before the dot-com bust in 2000) before the Feds stop receding. As of January, the Fed has already increased interest rates to 4%. This allows traders to assume that only a few more increases (up to 5.25%) could sustain inflation.
Status Quo of The Forward-Looking Macroeconomic Sentiment
The release of October inflation data will likely help formulate investors’ views of how aggressively the Federal Reserve will act at upcoming meetings. Economists The Wall Street Journal interviewed expect a 0.5% month-over-month rise. This excludes food and energy prices and an annual inflation rate of 7.9%. If the actual figures are much higher, this will introduce the cornering possibility of 6% rates.
As a result, the potential outcome might provide additional suffering for investments in long-term government bonds and technology stocks. When interest rates are high, investors are less likely to wait for their questionable “rewards.” If there’s a series of rate hikes in the future, the market could see another decline in 2022, this year’s 20% decline in the S&P 500 and the bond market downturn included. It is also feared that a 6% rate could result in a protracted recession. As a result, we’ll get high levels of unemployment and no easy path to recovery.
Markets’ Response so Far to The Fed Policy
The rise in interest rates has had a major impact on markets this year. This led to a bond rout and a 10-year Treasury yield of 4.125% on Tuesday. It was 1.496% by the end of 2021. When bond prices fall, the yields rise. Rising yields on ultra-safe government debt have caused stocks to decline. This especially increases technology shares, as they provide a safer investment option applicable in the distant future. The Nasdaq Composite, heavily focused on tech, has plummeted by 32% this year. Tighter financial conditions have led to a slowdown in capital markets, resulting in a decrease in the number of money businesses can raise through the sale of new stocks and bonds.