Last Friday, the stock market tumbled to its lowest point so far this year, with the S&P 500 falling for three weeks straight while the Dow Jones similarly slumped due to disappointing economic data. Investors expected inflation to decline more at the start of 2023, but experts say that it has actually re-accelerated in recent months. As a result, the Federal Reserve may continue to raise interest rates, a measure used to combat inflation that reduces the amount of money companies can borrow for further investments.
The market reacted poorly to this news as investors braced themselves for more rate hikes. “I think the market reaction we are seeing very clearly suggests investors think that the Fed has more work to do,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. A year of ever-rising interest rates has taken a toll on many companies, who must contend with higher operating costs and fiscal uncertainty. With the Fed poised to raise rates well above 5 percent, analysts predict that volatility will continue to increase both domestically and in global markets.
Still, stocks rebounded slightly at the start of this week as the reality about interest rates seemed to be setting in among investors. “Last week, some of the data spooked people and yields moved up again. But here we are on Monday morning and actually that’s sort of all forgotten about,” said James Rutherford of the investment firm Federated Hermes. “People are slightly hardened to it and understand that rates might go a little bit higher…but the market is not looking at next month’s inflation data, it’s looking at six months or nine months or even 12 months.” The market could adapt to conditions as companies grow accustomed to the Fed’s new rates, although only time will tell what effect this will have on driving down inflation.
Questions:
- Why are investors uneasy about the Federal Reserve’s plans to continue raising interest rates?
- Do you think the Federal Reserve should continue to raise interest rates? Why or why not?
Sources: Ryan Dezember and Chelsey Dulaney, “Stocks Inch Higher After Indexes Post Worst Week of 2023,” The Wall Street Journal, February 27, 2023; Joe Rennison, “Stocks Sink for Third Straight Week,” The New York Times, February 24, 2023.