The Only Thing That Will Save The Stock Market, According To Wall Street
Inflation, concerns over a looming recession, and an aggressive Federal Reserve interest rate increase policy, continue to affect the U.S. stock market. Business Insider reported on May 25, 2022, that the Nasdaq 100 has accumulated a drop of 30% year-to-date and the S&P 500 follows with a drop of about 20% for the same period. The media warns that the consensus on Wall Street "seems to be" that only a Fed pause can save the stock market.
In late 2021, the Federal Reserve began to swiftly withdraw the pandemic stimulus, designed to stabilize financial markets and ensure capital access, via BBC. The move opened the door to interest rate increases throughout 2022. In early May, the Federal Reserve increased interest rates again by 50 basis points. Two more hikes of 50 basis points are expected during the summer. The Fed also signaled a reduction of its $9-trillion balance sheet for the end of this May, Business Insider reported.
"The ongoing decline in the stock market is likely to last for as long as the Federal Reserve continues its current tightening cycle," Business Insider reports on the notes from Stifel and DataTrek Research. The Federal Reserve pause is only expected to happen, according to Stifel, if gas prices drop, inflation backs down, and GDP growth diminishes.
Will the Fed pause in September?
On May 24, 2022, Bloomberg reported on the comments made by the President of the Federal Reserve Bank of Atlanta, Raphael Bostic. Bostic discussed a Fed pause happening in September. The option is only on the table if inflation retreats, growth slows down, and unemployment rates increase, Bloomberg reports. The media adds that interest rates will increase in June and July by half a point, moving from 1.75% to 2%.
The President of the Fed of Atlanta said that pausing at the September 20-21 meeting might make "sense" if the conditions are met. "The $64,000 question for markets is what market and economic conditions would push the Fed to pause," UBS strategist Matthew Mish said. Mish added that it will take serious convincing for the pause to happen. Not only will they be looking at inflation but at falling growth as a sign of lower inflationary pressures.
The high yearly annual inflation rates could also force the Fed to look at monthly figures, according to Rishi Mishra, analyst of Futures First. Newsweek reported that the Federal Reserve wants markets to fall. Data Trek, via Business Insider, said that the Fed uses the drop and stock sell-off as a tool to fight inflation. Drop-in stock forces companies to rethink their hiring strategies, which feed wage inflation and consumer spending. "The Fed also knows that the S&P 500 is still 15% above its February 2020 pre-pandemic peak of 3,386," DataTrek co-founder Nicholas Colas said. While a September Fed pause is a possibility, it is still a long way to go with continued aggressive hikes. Markets in the short play remain volatile, uncertain, and bearish.