Investors suffered a topsy-turvy Wednesday as markets reacted to the news from the meeting at the Federal Reserve. With the Fed looking to raise interest rates as early as March, the markets stuttered with the S&P 500, Nasdaq and Dow falling. All of which suggests that market volatility is showing no sign of abating in 2022.
The good news is that no nasty surprises emerged from the Federal Reserve meeting. There was widespread expectation of the interest rate hike, plus the Fed’s initial policy statement to counter the overheating economy even caused a brief market rally.
However, this was followed by a sharp drop with investors realizing that the remainder of the year would be just as difficult as the past couple of months. Much of this was down to a gloomy press conference with Federal Reserve Chairman Jerome Powell following the monetary policy meeting.
The Dow Jones Industrial Average was hardest hit as it sank 350 points to end up 1% lower. The S&P 500 had it nearly as bad with a drop of 0.9% and the Nasdaq Composite saw its value slide by 0.7%.
It comes at a time when the economy is having to readjust following the ravages of the Covid-19 pandemic. With the tapering off of the monetary policy support, it’s expected that markets will see yet more turbulence in the coming months.
Jerome Powell gave little away following Wednesday’s meeting. He proved to be unforthcoming about whether there would be a 0.5% rise in interest rates in 2022. However, Powell did make the assertion that the inflation rate was much worse at the moment compared to 2015 – the last time that the Fed hiked interest rates.
The Federal Reserve Chairman said that there remained a real risk that inflation could be with us for many more months. With the specter of rising prices in many different sectors, there could be little option but to implement the planned interest rate rises. This is especially so as Powell confirmed that a number of supply chain issues remain problematic.
The introduction of higher interest rates would make the stock market more vulnerable and it’s probable that riskier stocks such as those in ‘big tech’ would be most likely to be affected. However, Powell seemed emphatic that the US economy will be able to stay out of recession and that the nation was enjoying a positive trend in regard to job numbers.
All of which means that the markets will face an uncertain month ahead of the next Fed meeting in March where the expected interest rate hike could be put into action. But with the balance sheet of the US economy still showing a lot of shrinkage to be attended to, it means that 2022 could be a tricky year for investors.
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