The stock market nosedived Friday after Federal Reserve Chairman Jerome Powell said American households and businesses can expect to experience “pain” and job losses as the central bank aims to bring down red-hot inflation.
“These are the unfortunate costs of reducing inflation,” Powell said. “But a failure to restore price stability would mean far greater pain.”
Powell’s comments were largely in line with the Fed’s previous talking points, but they nonetheless sent markets nosediving.
The Dow Jones Industrial Average dropped sharply following Powell’s remarks at 10 a.m. at a summit in Jackson Hole, Wyo., and continued to decline throughout the day, shedding 1,008 points to close down more than 3%. The S&P 500 fell an even sharper 3.4%.
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.
Powell told central bankers at their annual symposium in Jackson Hole that the Fed will likely impose more interest rate hikes in the months ahead in hopes of getting inflation under control.
The Fed chair made clear that he expects rates to remain at levels that should slow the economy “for some time.”
After hiking its key short-term rate by three-quarters of a point at each of its past two meetings, part of the Fed’s fastest pace of rate increases since the early 1980s, Powell said the Fed might ease up on that pace “at some point” — suggesting that any such slowing isn’t near.
“In essence, Powell is clearly stating that right now, fighting inflation is more important than supporting growth,” Jeffrey Roach, the chief economist for LPL Financial, told The Post.
Roach added the Fed will likely hike interest rates by 50 basis points in September and then continue to raise them by increments of 25 basis points in subsequent meetings.
He thinks the Fed will hike interest rates by 50 basis points in September and then continue to raise them by increments of 25 basis points in subsequent meetings.
Since March, the Fed has implemented its fastest pace of rate increases in decades to combat inflation, which has punished households with soaring costs for food, gas, rent and other necessities.
The Fed had slashed interest rates drastically in 2020 to soften the blow of the coronavirus pandemic, fueling a stock market boom that saw the Dow surge more than 20% in 2021.
The central bank has since lifted its benchmark rate by 2 full percentage points in just four meetings, from near-zero to a range of 2.25% to 2.5%. Some analysts expect the economy to fall into recession later this year or early next year, after which they expect the Fed to reverse itself and reduce rates.
“Given low levels of unemployment and relatively high levels of consumers’ savings, it is going to take time for inflation to come back down to the Fed’s target and markets have been on a roller-coaster ride this year, attempting to handicap what the impact will be to the economy and to corporate profits,” Chris Zaccarelli, chief investment officer for Charlotte-based Independent Advisor Alliance, told The Post.
“We would be grateful for the significant rally that we’ve had over the past two months, but be cautious at this point as it’s not entirely clear that the bottom is in for this cycle, let alone for 2022,” he said.
“There will be more volatility to come in the next few months, so caveat emtor.”
The Nasdaq Composite Index, which is weighted heavily toward tech stocks that generally thrive when rates are low, tanked even more than the broader market on Friday, falling 3.9%.
In his speech, Powell noted that the history of high inflation in the 1970s, when the central bank sought to counter high prices with only intermittent rate hikes, shows that the Fed must stay focused.
“The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done.”
With Post wires