Investors are skeptical on Wall Street. However, at the closing bell on Wednesday, the penalty fell: the main American stock market indexes ended lower, from 1.7% for the Dow Jones to 1.79% for the Nasdaq, after the decision of the central American bank (Fed) to raise its key rate by 75 basis points, or now in a range between 3% and 3.25%. The Federal Reserve has not tightened its monetary policy this quickly since the 1980s under the leadership of monetarist Paul Volker. The stock market is still in a bad direction on Thursday and European indices are frankly in negative territory. In Paris, the CAC 40 slid further to 5,900 points.
This increase of 75 basis points however is not a surprise: it was expected by more than 80% of the market, according to the FedWatch index. But strong rhetoric from Fed Chairman Jerome Powell left the door open for further hikes at the next two monetary policy committee meetings in November and December.
Central bankers actually forecast a rise of at least 125 basis points, which would take the median key rate to 4.4% and the “terminal rate” – or peak – to 4.6% in 2023. . And there is no need to wait for a rate cut before … 2024. The illusion, cherished for a while after the last 75 basis point increase in July, in a pause in monetary tightening, in fact completely lost.
Until the job is done
The comments of Jerome Powell are thus consistent with those of Jackson Hole (where the Fed hosts an annual conference of banks): priority given to the fight against inflation at the risk of causing a difficult landing for the American economy, even a recession. The word is firm and it has not deviated from the goal of returning inflation to about 2% (against 8.3% in August).
“Since Jackson Hole, the market has understood that the Fed will have to keep rates high for a while to have an impact on structural inflation”a bond manager told us before Wednesday’s meeting. “We will continue until the job is done”said Jerome Powell on Wednesday, without giving any details on the time needed to contain inflation.
All eyes are now focused on the employment numbers in the United States, which have become a barometer to test the aggressiveness of the Fed’s monetary policy. One thing is certain now, investors can no longer rely on the support of the central bank, as they have been used to since the financial crisis of 2008.
It is this paradigm shift that is driving the markets, stocks and bonds, down. After a certain rejection, investors are returned – brutally – to the principle of truth, which is for a long time with a high rate.
The rise leads to the fall
This is the reason that, this time, the rate increase in September was not greeted, as before, by a rebound in equities. In each previous rate hike in the United States (March 16, May 4, June 15 and July 27), the S&P index actually increased by 0.56%, 2.2%, 3% and 2.6% respectively.%. True, these rebounds quickly appeared short-lived, except perhaps in July, and the S&P index posted a drop of 20% since the beginning of the year. What qualifies the market as bearish.
“Nobody knows if the process (of raising rates, Editor’s note) will lead to a recession or not”criticized by Jerome Powell, for whom it goes “Depending on how quickly the inflationary pressure on wages and prices will decrease”. Leaving little hope for a soft landing for the economy. And yet the stock market still believes it!
In the meantime, the markets should continue their gentle slide, although more and more voices on Wall Street believe that most of the decline is now done. The market needs time to digest this new context but the fall in valuations, in equities as well as in bonds, will provide new buying opportunities.