On June 14, the Fed decided to skip a rate increase. However, the prolonged aggressive tightening, which has been going on for 15 months, triggered sharp price swings in stock, bond, and crypto markets. Analysts at Business Insider compared this surge in volatility to a roller coaster ride.
The central bank started raising rates on March 16, 2022, for the first time in the last two years. The regulator has been trying to tame galloping inflation for a while. Consumer prices have hit a 40-year high this year. The Fed has hiked the interest rate from 0 to 5% during 10 meetings in a row before taking a pause last week. Analysts assume that this is the most aggressive tightening cycle in the last 40 years.
Naturally, a hawkish stance has affected some assets. For instance, it led to a massive sell-off in the crypto market. Against this backdrop, Bitcoin and Ethereum incurred whopping losses. Investors have fewer returns and they are not eager to invest them in risk assets.
In this light, the stock market may experience havoc triggered by the Fed's attempts to curb inflation. Many speculators are not prone to add shares of popular companies, for example, included in the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average to their portfolios. This leads to a drop in their quotes. Notably, they all plunged into a bear market, with the Nasdaq taking it on the chin with a 20% loss. However, having pushed off from the bottom, they recovered amid expectations of a rate cut and the ChatGPT craze.
After rate increases, the benchmark stock indices traded near the levels reached in March 2022. However, over the past 15 months, the stock market has experienced numerous falls, in particular, a sharp drop in shares of regional companies and the collapse of US banks. It caused an outflow of capital from the US banking sector.
Apart from that, there was a spike in US government bond yields. Usually, Treasury notes move down when the Fed starts raising rates. Traders could sell bonds and make a profit. A similar situation occurred in September 2022 when bonds slid into a bear market. The yield on 2-year and 10-year government bonds has recently increased by 200 bps. The bond market has been showing signs of recovery since March 2022.
