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The stock market is shaky after Fed chair warned about future rate hikes

The U.S. stock market opened lower today as Federal Reserve Chairman Jerome Powell indicated that investors shall expect more interest rate hikes as “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.” This statement of the central bank’s chair brought the S&P 500 and the Dow Jones Industrial Average down to about 0.3% when the market opened.

Some major tech stocks that enjoyed an extraordinary run because of enthusiasm around artificial intelligence pulled back. Though, this setback is temporary. Amazon shares dropped 1% after the Federal Trade Commission sued the online retailer. Elsewhere, FedEx stock price also fell 2.4% after the shipping giant posted weaker-than-expected revenue for its most recent quarter.

The stock market is currently shaky because investors are getting nervous again. The anticipation of another interest rate hike forces investors to anticipate market reactions. Powell, in his testimony before Congress, said: “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”

The Federal Reserve does not feel at ease to maintain interest rates unchanged, let alone cutting them. Jerome Powell feels that, although inflation continues to be tamed, it hasn’t been tamed enough to afford cutting interest rates. Economic data showed that the market, overall, has been resilient. While there has been a slowdown in the economy, which is what the Federal Reserve wanted in order to reduce consumer demand, the overall economy remained positive with jobs being added to the economy, consumer spending still high, and unemployment barely increasing.

The likelihood that a recession will be imminent has substantially decreased. Most economists and financial professionals expect the economy to end up in a soft landing rather than an actual recession.

The Federal Reserve believes that the U.S. economy is still in a fragile state, and therefore, the central bank cannot risk cutting rates because it will bring inflation right back up to where it was in 2022.

If interest rates are hiked again, it could potentially take equities off their bull market territories. The bond market is currently not doing great since interest rates, although unchanged, remained significantly high enough. Thus the bond prices continue to decline or stay lower.

The central bank decided to hold off raising rates at its policy meeting last week, but raised its interest rates forecasts for this year, signaling rates could rise to as high as 5.6%. That implied two additional rate hikes are likely to be implemented this year. Three officials see rates rising closer to 6%. If rates are hiked to nearly 6%, then the market will no longer be bullish.


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