Fed raised 0.75% as expected but markets slumped. Why?

Alvin Chow
2022-09-22

The Fed raised the interest rate by 0.75% which was expected but the S&P 500 reversed course and closed down 2% for the day.

Shouldn't the market have already priced in this rate hike?

Yes, the market has priced in the current rate hike but it has not priced in the future rate hikes.

There was a shift in the expected rate hikes after the last Fed meeting. So the market adjusted for the new piece of information.

Markets are forward looking.

This is where we look at the Fed's dot plot - a chart that records each Fed official's projection for the central bank's key short-term interest rate.

In June, the median 2022 year-end projection was 3.4% while for end-2023 was 3.8%.

The dot plot released yesterday showed that the expectation has risen. End-2022 projection rose to 4 - 4.5% while end-2023 saw 4.5 - 5% estimates.

There's also no easing of interest rate until 2024.

A very quick escalation considering only 3 months have passed.

While the accuracy of the dot plot is a suspect, it does signal how increasingly hawkish the Fed has become which brings about more recessionary fears to the markets.

It doesn't help when the Fed chairman's language was harsher than previous speeches. The term 'soft landing' has been ditched and Powell replaced it with 'some pain'.

He said, "higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they're not as painful as failing to restore price stability."

It is also going to be painful for growth stocks for the next few years too.

PS: I will be doing a live webinar on Tiger platform on 27 Sep 2022 - register here https://live.byteoc.com/9999/6253271

Powell speech in Jackson Hole: will market rebound or plunge?
Major indices rebounded ahead of Jackson hole meeting. Some investors are looking forward to dovish news from Powell speech; while others warn of another plunge as Powell may stay hawkish in light of strong economy. --------------- Do you think the market will rebound? Or the pessimistic expectations will open another down trend?
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • StreetCat
    2022-09-23
    StreetCat
    Previously raised interest rates but cpi and inflation is still high. How will another hike help? Every 3 months raise 0.75% and pray? Why not source for cheap energy alternatives to solve the transport issue to alleviate rising cost of goods and open bilateral trade? Raise interest rates also makes their usd even stronger and the whole world is using usd to trade globally. Prices of things will only go up till it is unaffordable...
  • Slsebast
    2022-09-23
    Slsebast
    Thanks for sharing. Many will just assumed thay market have priced it in but the fear of recession does have an effect on people as well
  • powerbert
    2022-09-23
    powerbert
    Thanks for the information, now I know why the market is dropping.
  • skiing
    2022-09-23
    skiing
    Thanks for sharing. Expectations are really killing the market
  • ChristKitto
    2022-09-22
    ChristKitto
    I keep investing in stocks every month as they go down. That strategy makes sense for long-term investors who have the time to suffer over the next few years until they can enjoy the inevitable recovery of stocks.
  • EugeneKopi
    2022-09-23
    EugeneKopi
    Expected , wait for reboun d
Leave a comment
162
4