Dow Jones drops 1,160 points in worst trading day since June 2020

Markets slumped over the past month as the Federal Reserve announced it would regularly raise interest rates by half a percentage point for the foreseeable future to combat persistent inflation. On Wednesday, the dow (INDU) lost more than 1164 points, or 3.6%, its biggest loss since 2020. The broader market lost 4%, putting the S&P 500 (SPX) on the precipice of bear market territory. The Nasdaq Composite lost 4.73%.
Now, investors are asking for more. They are calling for a three-quarter point rate hike at the end of the Fed’s June meeting, despite assurances from Fed Chairman Jerome Powell that such a high hike is not on the table.

Analysts at Bank of America wrote in a note that they fear a US wage and price spiral soon due to risks of “the Fed raising too little.” The current market reaction, they said, suggests that “investors see that the Federal Reserve is moving too slowly in the fight against inflation: a 75 [basis point] The walk could have been dreaded, but it seems that it would have been preferable.”

Nomura Securities has forecast that the central bank will raise the fed funds rate by three-quarters of a point in June and July after raising a half-point in May.

“We recognize that Fedspeak has not yet fully endorsed a 75 basis point hike, but in this high inflation regime we believe the nature of the Fed’s forward guidance has changed – it has become more data dependent and agile.” said Rob Subbaraman, global director of Nomura. market research, in a note.

The Fed could raise rates to 5% by the time the current tightening streak ends, Deutsche Bank’s chief economist said. That would be the highest level since 2006.

Fed funds futures traders see a 9% chance the Fed will raise its main policy rate target by three-quarters of a point in June, to between 1.5% and 1.75%, according to CME FedWatch Tool. .
St. Louis Fed President James Bullard has fanned the flames of a possible three-quarters of a percentage point hike this year in public speeches and Cleveland Federal Reserve Bank President Loretta Mester told The Japan’s Nikkei that a rise of 0.75 percentage points later cannot be ruled out. this year in an interview on Monday.
A screen shows a press conference with Jerome Powell, Chairman of the United States Federal Reserve, following the news of the Federal Reserve's decision to raise interest rates by half a percentage point on the floor of the Stock Exchange from New York on May 4.  2022.

So why are markets fighting back against the Fed chairman’s assurances that a bigger hike won’t happen in June, and getting hurt by predicting that it will?

“When a Fed official suggests a 50 basis point hike, markets immediately start trying to price in 75 basis point hikes,” said Jamie Cox, managing partner at Harris Financial Group. “It’s really crazy.”

The Dow is down 5,095 points, or 14% in 2022. The S&P 500 is down more than 18%, and the Nasdaq Composite is down about 28%.

“Powell tried to take the 75 basis point hike off the table at the last news conference,” said David Lebovitz, global market strategist at JP Morgan Asset Management.

But the following week, the Consumer Price Index, a key measure of inflation, shot up 8.3% for the year. The move was lower than the 8.5% rise in March, but higher than the 8.1% rise economists had expected.
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The problems between the markets and the Fed may have less to do with self-flagellation and more to do with a growing mistrust of the institution. The old mantra of “don’t fight the Fed” has morphed into “don’t believe the Fed.”

“People are starting to lose faith in the idea that the Fed really has its arms around inflation,” Lebovitz said. “It’s about controlling what the Fed is going to do and unfortunately given the lack of clear guidance from them and an inflation report that surprised to the upside, investors are a bit uneasy.”

Even former Fed Chairman Ben Bernanke cast some doubt this week when he broke the unspoken edict among former Fed chairmen not to speak ill of their successors. The Fed made a mistake by delaying its decision to raise rates, he said during an interview on CNBC’s Squawk Box on Monday.

“And I think they agree that it was a mistake.”

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