Fed's Caution on Inflation Drags US Equities Down

Fed’s Caution on Inflation Drags US Equities Down, Nasdaq Corrects 1% for Second Day

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by Bhushan Akolkar · 3 min read
Fed’s Caution on Inflation Drags US Equities Down, Nasdaq Corrects 1% for Second Day
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Market’s bullish sentiment dampens with the Fed hinting that more rate hikes are on the cards amid the sticky inflation.

On Wednesday, August 16, stocks continued to fall on Wall Street for the second day in a row as investors grappled with Fed’s July meeting thereby hinting at potentially higher interest rates ahead. All of the top three US indices turned negative for the second consecutive day.

Dow Jones Industrial Average (INDEXDJX: .DJI) fell by 0.52%, shedding 180.65 points to reach 34,765.74. The S&P 500 Index (INDEXSP: .INX) decreased by 0.76%, closing at 4,404.33. In the same period, the Nasdaq Composite (INDEXNASDAQ: .IXIC) dropped by 1.15% to finish the day at 13,474.63.

During the July meeting, the Fed officials noted that additional monetary policy tightening was necessary in order to bring inflation down. The meeting summary notes:

“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

The federal funds rate is already at its 22-year high and is currently between 5.25% to 5.5%. The Intel stock saw a decline of over 3%, dragging Dow Jones lower. Sectors like communications services, real estate, and consumer discretionary, each faced losses of more than 1% in the S&P 500.

Amidst this, the corporate earnings season continued. Target’s shares rose by around 3%, despite the retailer lowering its full-year outlook. Progressive, an insurance company, experienced an increase of nearly 9% due to positive earnings results.

Equities faced a challenging period in August, with the S&P 500 hovering around lows not seen in a month. Data highlighting persistent inflation and a strong economy are fueling concerns that interest rates could remain elevated for an extended duration. Although investors mostly anticipate that the Fed’s monetary tightening is approaching its conclusion, there are concerns that the central bank might prolong the current rate levels.

Wall Street Experts Share Their Views

Market analysts chipped in sharing their views on the Fed’s comments and what follows ahead. Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia said:

“I agree with the governors that we’re not convinced that inflation is totally in the rearview mirror. I think the markets will be on pins and needles regarding what the Fed will do all through September and into October.”

According to Quincy Krosby, LPL Financial’s Chief Global Strategist, market sell-offs persist as the recent Fed minutes highlight the necessity for the economic backdrop to scale back, thus leading to a softening in demand.

“Recent third-quarter GDP estimates, coupled with fresh retail sales data, suggest a much more robust underpinning to the economy, certainly not what the Fed wants to see as they navigate the so-called ‘last mile’ towards achieving price stability,” Krosby added.

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