Dow Finishes Worst Week Since October As Traders Worry Fed Hikes Coming Soon

Stocks dropped, with the Dow plummeting 533 points, on Friday as investors mulled the likelihood of the Federal Reserve moving away from near-zero interest rates sooner than expected as inflation is projected to climb higher than earlier forecast.

On Wednesday, the Federal Reserve kept interest rates unchanged at near-zero, but caused a stock sell-off after it projected two possible rate hikes by the end of 2023—a switch from March, when it indicated no rate increases until at least 2024. On Friday, St. Louis Fed chief James Bullard told CNBC he expects the first such rate increase to occur in late 2022. The central bank also predicted Wednesday the headline inflation rate could reach 3.4% by end of this year, up from its 2.4% forecast in March, and well above its 2% target.

“The Fed is now signaling that rates will need to rise sooner and faster,” James McCann, deputy chief economist at Aberdeen Standard Investments, wrote in a note. “This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.” Investors may also be interpreting the central’s “hawkish tilt” as a sign that the economic expansion in a post-pandemic U.S. might be a bit harder to achieve, Goldman Sachs’ analyst Chris Hussey warned

On Thursday, the Labor Department reported initial jobless claims unexpectedly rose to 412,000 last week, up 37,000 from the previous week, well above economists’ consensus estimates of 360,000. But Thomas Simons, economist at Jeffries, wrote this might just be a blip and that claims will likely keep falling. “Barring a resurgence in virus cases and a reversal of the progress made on reopening and increasing capacity, we should not see any more of a back up in claims on a sustained basis,” he said.

San Francisco Fed President Mary Daly said on Tuesday central bank officials have started talking about tapering off its $120 billion monthly bond buying program – a policy that has bolstered equity markets since last March — as the economy continues to improve. After the FOMC meeting on Wednesday, chairman Jerome Powell cautioned the central bank hasn’t made any concrete decisions on reducing asset purchases yet, but some analysts expect tapering to commence later this year. Jim Paulsen, chief investment strategist at Leuthold Group, told CNBC the Fed should soon reduce these asset purchases. “I don’t see what benefit there is now of having all this excess liquidity out there,” he said. “If it’s not creating runaway inflation, then it’s really not doing anything. Why leave it hang around?”







Source: Forbes
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