Stock markets tumbled again Tuesday as economic fears fuelled a global rout, among the reasons for which was the Federal Reserve’s readiness to raise interest rates in spite of inflation not showing any signs of slowing.
Trading floors of stock markets have been in a panic since data on Friday showed US consumer prices rising at their fastest pace in a generation due to the Ukraine war, China’s lockdowns, and supply chain snarls.
All assets are feeling the squeeze, with bitcoin nearing $20,000 for the first time since December 2020, currencies retreating against the dollar, and even safe-haven investments including the yen and gold suffering.
As the Fed struggles to walk a fine line between reining in inflation and maintaining a healthy economy, investors are now focused on Wednesday’s interest rate decision.
At Quill Intelligence, Danielle DiMartino Booth predicts that if inflation continues to surprise to the upside, the Federal Reserve will be able to raise interest rates by more than half a percentage point in the near future.
Nevertheless, JP Morgan Asset Management cautioned: “While inflation is a significant challenge at this point for the US, slamming on the brakes too hard risks sending the economy in the wrong direction.”
Before Friday’s announcement, there had been expectations for a 50-point basis increase, and a signal that more of the same would follow. Analysts now say there is a one-in-three chance that officials will announce a three-quarter point hike, with some predicting even a one-percentage-point increase.
Stock Markets dropping globally
Fears have been rampant that the world’s top economy is headed for a recession, and on Monday Wall Street plummeted with the broad-based S&P 500 sinking into a bear market after dropping more than 20% since its recent peak.
In Asia stock markets, Sydney dropped five percent when it reopened after a holiday weekend to deal with Monday’s drama, Tokyo was down around two percent, and Wellington dropped more than three percent.
In addition to Hong Kong, Shanghai, Seoul, Singapore, Taipei, and Manila stock markets were all in the red.
Fed has a tough decision to make on Wednesday, according to commentators. It could signal its determination to defeat inflation by raising rates by more than 0.50%, but it could also damage its credibility as it confuses traders’ signals in stock markets.
As soon as the Fed moves in 75s, it will be hard to stop, and the combination of this with the Fed’s outcome-based inflation approach could trigger a recession, said Evercore ISI’s Krishna Guha and Peter Williams.
A more aggressive approach has sent the dollar spiraling higher against other currencies, reaching a record high against the yen and a record high against the rupee.
While both units have recovered some losses, they are still under severe pressure, and the euro is in danger of reaching a two-decade low. Meanwhile, the pound is weaker than it has been for two years.
The price of bitcoin hit $20,823 for the first time since December 2020, as news broke that crypto lending platform Celsius Network had halted withdrawals due to unstable conditions.
Concerns were raised about a possible chain reaction for other crypto firms.