The key US stock market indices – Dow Jones, NASDAQ, and S&P 500 – ended Tuesday with a new fall. From our point of view, everything is going according to plan, as we expected the US stock market to show at least one more major drop. Recall that in the last few weeks, the indices showed very strong growth, which put many traders, investors, and analysts in a stupor, who thought that the "bearish" trend was over. We hold a different point of view. The stock market's growth in the context of the Fed's monetary policy continuing to tighten looked very strange.
Nevertheless, it could be corrective. And now, everything is falling into place when the market is falling. Most importantly, the Fed does not let the markets calm down. Jerome Powell made it clear last week that rates will continue to rise and that the period of high rates will drag on. Yesterday, the head of the Federal Reserve Bank of New York, John Williams, confirmed Powell's "hawkish" rhetoric. However, on this matter, we need to start not with Williams or Powell but with James Bullard, who a month ago said that the rate would have to be raised to 4% or higher and as soon as possible. We also discussed that 3.5% might not be enough to return inflation to 2%. As we can see, other members of the Fed monetary committee are coming to this opinion.
The head of the Federal Reserve Bank of New York said that the Fed would continue to work on the alignment of supply and demand, which will take longer than expected. If it was assumed that next year the Fed would begin gradually reducing the rate (after defeating inflation) to return it to a neutral level, now Williams is talking about abandoning such expectations in 2023. Thus, after Williams' speech, the probability of a new aggressive rate hike in September, a longer period of high rates, and a long fight against inflation sharply increased. It is noteworthy that Williams is not the "most important hawk" in the Fed, so his words should be treated with increased care. If even the neutral members of the FOMC talk about the need for a stronger tightening of monetary policy, then they do not believe in a rapid return of inflation to the target level. We now expect a weak report on the August CPI, which will be released on September 14. If it is really weak, the rate may rise by 0.75%. This means only one thing for the stock market – a new fall. The longer the rhetoric of FOMC members remains "tough" and "hawkish," the longer the demand for stocks and indices will continue to decline.
