Invest for Volatility as Markets Plummet on Fed’s Inflation Stance


The highly anticipated speech from Federal Reserve Chair Jerome Powell Friday led to disappointment and a market drop-off into the close, with the major indexes closing down for a second week in a row. Powell reiterated the central bank’s fight against inflation, recommitting again to doing what is necessary to bring inflation back under control, reported CNBC.

The Dow Jones dropped more than 1,000 points for a total of a 3.03% loss Friday and 4.2% for the week, the S&P 500 fell 3.37% for the day and 4% for the week and lost its August gains, and the Nasdaq Composite was down 3.94% Friday and 4.4% for the week.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said.

Stocks had entertained a rally in August after July’s CPI report came in flat month-over-month, leading to speculation that the Fed might ease on rate hikes at their next meeting in September but Powell left little room for doubt when he underlined the importance of bringing inflation down, even at the cost of “pain” for households.

Powell acknowledged that the central bank’s measures to bring inflation back in hand “will also bring some pain to households and businesses. Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” reported the WSJ.

There wasn’t much in the way of any new guidance from the Fed, mostly a reiteration of previous messaging that the central bank is willing to do what it takes to combat inflation, even if it is at the cost of economic recession. What’s more, Powell repeated Fed projections from June that predict interest rates around 4% by the end of next year, possibly in response to recent investor hopes of an easing from the Fed earlier next year.

“We believe what they say that rates are going to be higher for longer and we’ve seen some repricing of the cuts in 2023.,” Zach Hill, head of portfolio management at Horizon Investments, told CNBC. “We think there’s more to go on that front and it’s likely to continue to fuel equity volatility from here.”

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