- In its fight to lower inflation and want prices to fall, the Federal Reserve also seeks to cool down the stock market.
- On August 29, the president of the Minneapolis Fed, Neel Kashkari, publicly declared that he was “happy” to see the stock market fall.
- Several economists have said Powell is likely to make a decision to raise interest rates by 100 basis points on Wednesday.
The latest data on inflation showed that the CPI is still above 8% when the objective of the Federal Reserve is to bring that figure to 2% per year.
It’s a long way to go, and while the Fed raised rates by 75 basis points twice in a row, it’s possible that the hike is now more aggressive and the number is 100 points.
Why would they go up by 100 basis points? The Federal Reserve knows this will cause a sharp drop in the stock market, something it has been looking for for a long time. It’s part of the plan to cool down the economy. In addition, it is also to generate credibility in a society that increasingly suffers from high and persistent inflation.
In June, the central bank announced its biggest rate hike since 1994, and by that time, the S&P 500 had already fallen more than 20% from its Jan. 4 high. In that speech, Fed Chairman Jerome Powell spoke of “pan” for businesses and individuals. “There could be some pain involved in restoring price stability”, he had said.
Later on August 29, Minneapolis Fed President Neel Kashkari publicly stated that he was happy to see the stock market fall.
Stocks are clearly part of the economy and the Federal Reserve is trying to cool the market by raising rates, with the aim of tightening financial conditions, making it more expensive for businesses and consumers to finance things. The combo is simple: high rates, a strong dollar and falling stocks.
Powell is expected to reiterate inflation targets on Wednesday but investors are awaiting the rate hike announcement. The opinion is divided. There are economists and businessmen who assure us that the Fed will only raise rates by 75 basis points again because there is also the risk of deflation.
What we can see for sure is that, in this context, the Fed is not on the side of Wall Street. When inflation goes down, something that is slowly starting to show, maybe Powell will change teams again. For now, the outlook is uncertain.
Similarly, if the 75 basis point rise is confirmed, which would mark the third in a row, it would give stocks a boost and could see another rebound in the market. No one has the crystal ball, so we just have to wait…
