The stock market is practically begging to be punished

Markets slumped over the past month, as the Federal Reserve telegraphed that it would regularly raise interest rates by half a percentage point for the foreseeable future to combat persistent inflation growth. Wednesday, daw (INDU) It lost more than 500 points and the broader market lost 2%, putting Standard & Poor’s 500 (SPX) On the edge of a bear market area.
Now, investors are asking for more. they Calls for a three-quarter point rate hike At the conclusion of the June Fed meeting, despite Fed Chair Jerome Powell’s assurances that a hike this high is not on the table.

Bank of America analysts wrote in a note that they fear there will soon be a wage-price vortex in the US due to the risks that “the Federal Reserve is going up too little”. They said the current market reaction is that “investors see the Fed as moving too slowly in the fight against inflation: .75 [basis point] Perhaps there was an apprehension about height but it seemed like it was a favourite.”

Nomura Securities forecast that the Fed will raise the federal funds rate by three-quarters of a point in June and July after rising by half a point in May.

Fed Chairman Jerome Powell: We will not hesitate to raise interest rates to tame inflation

“We recognize that Fedspeak has not explicitly endorsed a 75 basis point hike yet, but in this high inflation regime, we believe the nature of the Fed’s future guidance has changed — it has become more data-driven and smart “. Market Research, in a note.

Deutsche Bank’s chief economist said the Fed could raise interest rates to 5% by the time it ends the current tightening round. This will be the highest level since 2006.

Federal Reserve fund futures traders see a 9% chance that the Federal Reserve will raise its main policy target by three-quarters of a point in June, to between 1.5% and 1.75%, according to CME FedWatch Tool.
Louis Fed President James Bullard ignited the fire for a potential three-quarter hike this year in public speeches, said Loretta Meester, president of the Cleveland Fed. Japan’s Nikkei Index That 0.75 percentage point rise cannot be ruled out later this year in an interview on Monday.
A screen showing a press conference with Jerome Powell, Chairman of the United States Federal Reserve, after news of the Federal Reserve's decision to raise interest rates by half a percentage point on the floor of the New York Stock Exchange on May 4, 2022.

So why are markets fighting the Fed chair’s assurances that a bigger increase won’t come in June – and hurting themselves by predicting that it will?

“When a Fed official proposes a 50 basis point increase, the markets immediately start trying to price the 75 basis point increase,” said Jamie Cox, managing partner of Harris Financial Group. “It’s really crazy.”

The Dow Jones fell 3,930 points, or 11%, in 2022. The S&P 500 fell nearly 14% and the Nasdaq Composite lost more than 25%.

“Powell tried to pull 75 basis points off the table at the last press conference,” said David Leibovitz, global market analyst at JPMorgan Asset Management.

But the following week, the Consumer Price Index, a key measure of inflation, Up 8.3% for the year. The measure was less than the 8.5% increase in March, but higher than the 8.1% increase economists had expected.
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The issues between the markets and the Federal Reserve may have less to do with self-flagellation and more with a growing mistrust of the institution. The old mantra of “Don’t fight the Fed” has turned into “Don’t believe the Fed.”

“People are starting to lose faith in the idea that the Fed has real arms around inflation,” Leibovitz said. “It’s all about getting control of what the Fed is going to do and unfortunately, given the lack of clear guidance from them, and the inflation report that surprised the upside, investors are a bit uncomfortable.”

up to the previous Federal Reserve Chairman Ben Bernanke He aroused some suspicion this week when he broke an unspoken decree among former Federal Reserve chairs not to speak ill of their successors. He said during an interview that the Fed made a mistake in delaying its decision to raise interest rates On CNBC’s Squawk Box Monday.

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

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