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Fed officials on Thursday reiterated calls for aggressive policy to combat stubbornly high inflation—fueling expectations for bigger rate hikes amid a stock-market selloff that’s seen major indexes hit new lows for the year—and some analysts project that the losses could only deepen.
Real interest rates, which remained negative since July 2020, “have to be in positive territory and held there for a time,” Cleveland Fed president Loretta Mester told CNBC Thursday morning, lamenting that inflation remains too high and warning the Fed still has room to raise rates more: “We’re still not even in restricted territory on the funds rate.”
In a speech on Thursday, St. Louis Fed president James Bullard issued a similarly hawkish call, saying it “does look like” the Fed is expecting a “fair amount of additional moves this year” to put “meaningful” downward pressure on inflation.
Expectations for rate hikes climbed amid the comments, with markets on Thursday pricing in an end-of-year rate of 4.5%—above the 4.4% rate Fed officials projected earlier this month, which itself was one percentage point higher than the forecast in June.
“The gloom is back, and it’s even worse than ever,” analyst Adam Crisafulli of Vital Knowledge Media said in a note as stocks plunged Thursday, adding that markets could bounce back again as they did earlier this week but that the S&P will struggle to climb back above 3,900 (7% above current levels) until Fed projections—which are contingent on inflation coming down—improve.
In a note, Morgan Stanley analyst Michael Wilson said the firm remains “convinced” that the S&P will hit an eventual low of between 3,000 to 3,400 points later this year or early next, suggesting it could still plunge another 7% to 18%.
Analysts at Goldman Sachs and Bank of America are slightly less bearish, projecting that the S&P will only fall to about 3,600 (in line with current levels), though Goldman also noted the index could tumble another to 3,150 if the economy falls into a recession.
“The Fed is signaling they expect to tighten monetary policy enough to cause a recession,” says Bill Adams, chief economist for Comerica Bank. He notes economic data released Thursday reinforced the likelihood of another 75-basis-point rate hike at the Fed’s November meeting. Data from the Bureau of Economic Analysis showed the economy grew 1.5% more since the start of the recession than previously known, and jobless claims unexpectedly fell last week.
What To Watch For
Goldman economists project the Fed will hike rates by another 75 basis points in November, 50 basis points in December and 25 in February. However, inflation data due on Friday and labor market releases slated for next week could certainly push that outlook up—again.
Stocks have been plunging since August when Fed officials signaled in meeting minutes that they may need to act more aggressively in order to quell inflation. The S&P has tumbled 24% this year, and the Nasdaq has cratered 312. In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said the Fed will likely keep interest rates elevated for longer in order to offset the inflation challenges that have lingered for more than a year—“even if it requires more economic pain,” as officials have increasingly warned since last month.
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