Investors are still digesting the Fed’s proposal to tighten monetary policy, sending stocks down for the third day. The central bank said Wednesday that it plans to slowly shrink its balance sheet later this year, and signaled that it could raise interest rates again as early as September.
The proposal sparked a sell-off in stocks, with the Dow Jones industrial average dropping more than 140 points on Thursday. The S&P 500 climbed down to 0.1%, and the Nasdaq composite also fell 0.1%.
Some investors are concerned that the Fed’s plan could lead to higher interest rates and slower economic growth.
On Thursday, utilities, consumer staples, and healthcare firms modestly climbed as investors sought safe-haven stocks like Walmart, Coca-Cola, and Procter & Gamble.
The market is trying to come to grips with the Fed’s message; it’s a change in policy and has consequences.
The Fed’s actions came following the release on Wednesday of minutes from its March meeting, which revealed that policymakers expected to cut their trillions in bond holdings by roughly $95 billion. Meanwhile, authorities have hinted that one or more 50-basis-point interest rate rises may be necessary to combat inflation.
The released minutes were a warning shot to the markets that the Fed is getting ready to reduce its balance sheet and start raising interest rates to fight inflation.
Governor Lael Brainard said on Tuesday that lowering prices will need a combination of gradual increases and vigorous balance sheet reduction. The Fed is expected to raise rates by a total of 250 basis points this year, according to the markets. “All participants underlined their strong commitment and resolve to take the actions necessary to restore price stability,” the minutes read.
In the bond market, the suffering has been more profound. Treasury rates have increased, although from historically low levels, as they move in the opposite direction of prices. As a result, the bond market’s first-quarter losses were the worst in a quarter-century.
On Thursday, the 10-year Treasury note yield hit a six-week high of 2.627%, while the 30-year bond yield touched 3.05%.
Investors are also worried about how the Fed’s move will affect foreign economies and markets. However, this is needed to get inflation under control and keep the economy growing.
The Fed’s proposal to tighten monetary policy comes as the central bank tries to get ahead of rising inflation. The move also underscores the Fed’s confidence in the economy and its plan to reduce its stimulus.
But some investors are concerned that the Fed’s plans could lead to a sell-off in stocks and higher interest rates. Higher interest rates could make it more expensive for companies and consumers to borrow money and cause a sell-off in stocks. Furthermore, the Fed’s plans could also lead to a stronger dollar, hurting U.S. exports.
While the Fed signaled that it could raise interest rates again in September, it also said it would be data-dependent and could change its plans depending on the economy.
Furthermore, inflation is scorching, but so is the money that’s burning a hole in people’s pockets – leading to this move from the Feds.