Fears that the US Federal Reserve will not be able to stop rising inflation, which is at a four-decade high, without plunging the US economy into recession, led to a fiasco in today’s Wall Street session.
The Dow Jones Industrial Average closed down 1.99% to 32,245.70 while the Standard & Poor’s 500 shed 3.20% to 3991.24, breaking 4000, the lowest level since March 2021 of the year.
The Nasdaq Composite Technology Index fell 4.29% to 11,623.25. The Nasdaq also closed up more than 4% on Friday.
Investors are increasingly concerned about the limits of the Fed’s policy at a time when supply chain disruptions pose a major threat to inflation, along with the war in Ukraine and lockdowns in China as a result of the pandemic.
Data released today shows that US consumers have seen prices higher for three years than they thought a month ago, a wake-up call for Fed officials who are trying to meet longer-term expectations.
Shortly after the stock market closed, the Fed warned in its Financial Stability Report of deteriorating liquidity conditions in key financial markets amid growing risks of a war in Ukraine, monetary tightening and high inflation.
On Friday, U.S. labor market data showed that the share of the workforce – employed or looking for work – fell to 62.2%. In turn, hourly wages rose by 5.5% year on year, but were below analysts’ estimates.
These figures are worrying the market, given that they could signal an even tighter monetary policy from the US Federal Reserve not only to curb inflation but also to ensure full employment.
Fed Chairman Jerome Powell said last week that the central bank is expected to raise interest rates by another 50 basis points in the next two meetings (June and July), but he sees no need for a 75 basis point hike. However, the market is increasingly wary of further tightening.
