The stock market took a volatile turn on Tuesday morning in anticipation of the Federal Reserve’s next move to address high inflation and economic fears.
- The May Federal Reserve meeting is currently in session through Wednesday, May 3, and may announce another 25-basis-point interest rate hike tomorrow morning.
- All of the major stock indexes took a hit Tuesday morning—with fears of national debt defaulting and interest rates unnerving the market.
- The S&P 500 Index is down 1.2%, The Dow Jones Industrial Average is down 1.2%, Nasdaq Composite down 1.1%, and Russell 2000 is down 2.1%.
- Smaller banks like PacWest Bancorp (25%), Western Alliance Bancorp (19%), and Zions Bancorp (12.4%) have taken larger drops, coming off the collapses of three major U.S. banks due in part to high-interest rates.
- Ten-year treasury bonds dropped 3.573% to 3.443% in one day.
Why It’s News
Wednesday’s Fed decision on hikes could set the tone for the economy going forward—with either more aggressive bank hikes or a more hands-off approach to prevent a recession. As we previously reported, the Fed is in a precarious position, having to choose between allowing heightened inflation or sending the economy into recession. Yearly inflation did drop in March to 5% from its peak in June 2022, but the rate of decrease is slow, and inflation continues to burden the economy.
At the same time, the historic collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank has reflected poorly on the Fed. Its poor oversight and monetary tightening policies played a key role in these collapses—with the Fed raising rates from nearly nothing to 4.75% to 5% in 13 months.
This has created a pinch for the Fed, where neither of its options is likely to create short-term economic gains without significant hardships. This creates additional problems for investors, who are usually able to calculate interest rates into their investment strategies and work around them, but who need more certainty.
The shrinking U.S. labor market—down to 9.6 million available jobs in March—is a sign that the Fed’s tightening practices are having an effect and slowing down the overall economy. The unfortunate side effect is that continued decline would spark a severe recession that could further harm the working class, who are already struggling with inflated food and housing prices.
“Admittedly, this is a 20:20 hindsight view, and the Fed’s job is as tough as it has ever been, but while it would be nice to be finished with the Fed hiking cycle, too much caution in the past, among other factors, caused the current inflation overshoot and there remains a distinct possibility that it could accelerate again, especially given all the uncertain factors in the world today,” says Nikko Asset Management strategist John Vail.