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

The old joke goes like this: Two friends are at a resort and one says, “The food here is really awful.” The other replies, “And the portions are so small!” Today, it’s investors who don’t like the taste of Federal Reserve interest rate hikes — but apparently want more anyway.

Markets plummeted last month when the Federal Reserve cabled it would regularly raise interest rates by half a percentage point in the near future to combat persistent inflation.

On Wednesday, the Dow dropped more than 1,164 points, or 3.6%, its biggest loss since 2020. The broader market lost 4%, putting the S&P 500 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 conclusion of the Fed’s June meeting, despite assurances from Fed Chairman Jerome Powell that such a high rate hike is not on the table.

Analysts at Bank of America wrote in a note that they fear there will soon be a price and wage spiral in the US because of the risks that “the Fed will rise too little.”

The current market reaction, they said, suggests that “investors see the Fed moving too slowly in the fight against inflation: a high of 75 [pontos base] might have been feared, but it seems it would have been preferred.”

Nomura Securities predicted the central bank will raise the federal funds rate by three-quarters of a point in June and July, following the half-point increase in May.
“We recognize that Fedspeak has not yet fully endorsed a 75 basis point increase, but in this high-inflation regime we believe the nature of the Fed’s forward guidance has changed – it has become more data-reliant and agile,” said Rob Subbaraman, Chief Executive Officer. of Nomura’s global division. market research, in note.

The Fed may raise rates to 5% when the current tightening crisis ends, the chief economist at Deutsche Bank said. That would be the highest level since 2006.

Federal funds futures traders see a 9% probability that the Federal Reserve will raise its key interest rate target by three-quarters of a point in June to between 1.5% and 1.75%, according to the report. CME FedWatch Tool.

The chairman of the Fed of St. Louis, James Bullard, fanned the flames for a potential three-quarter-point increase this year in public speeches, and Cleveland Federal Reserve Chair Loretta Mester told Japanese newspaper The Nikkei that a 0.75 percentage point increase would not could be discarded later. this year in an interview Monday.

So why are markets fighting the Fed chairman’s assurances that a bigger rally won’t happen in June — and hurting themselves by predicting it will?

“When a Fed official suggests a 50 basis point increase, markets immediately start trying to price in 75 basis point increases,” 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 high off the table at the last press 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, rose 8.3% for the year. The move was lower than the 8.5% rise in March, but higher than the 8.1% rise expected by economists.

The issues between the markets and the Fed may have less to do with self-harm and more to do with a growing distrust 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 their lack of clear guidance and an inflation report that surprised on the bright side, investors are a little uncomfortable.”

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

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