US Stock Market, Rising Rates and Fears of Recession: Everything You Need to Know


What was only temporary is now the priority of global central banks. Inflation is rattling stock market investors around the world. As the US Fed successively raises interest rates, the quantum of further rate hikes remains to be seen in light of upcoming inflation data.

Many experts expect a milder recession and a soft landing after rate hikes, but that could largely depend on the easing of the relevant supply chain and falling commodity prices.

How the stock market reacts to various supply and demand indicators amid inflation data will determine the long-term trajectory for investors. The S&P 500 and Nasdaq are both in bearish territory after falling 20% ​​from their recent highs.

The battle between the US Fed and inflation seems to be just beginning. It remains to be seen how this will play out and how much damage it will cause to the economy.

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Here are some insights from industry experts who keep a close eye on global markets.

Arvind Chari, CIO, Quantum Advisors

Some central banks seem in a hurry this year. The US Fed raised rates by 150 basis points between March and June.

Most central banks spent the latter part of 2021 initially ignoring inflation to continue supporting growth, then hoping inflation would be “transient”. They recognized its severity and began to act on it, however, they would now wish and pray for divine intervention.

“Festina Lente” which means “hurry slowly” in Latin, is an oxymoron. The central bankers, so pampered by the markets, wanted to act on inflation, but at a measured pace.

In the latter part of 2021 and the pre-war months of 2022, they spent communicating that they would increase but at a measured pace. They didn’t want to shake up the markets. This approach does not work.

They are now in Operation Warp Speed ​​and are not only shocking the markets but also unable to guide future expectations convincingly.

The FOMC now expects the median Fed funds rate (on a dot-plot basis) to be 3.4% by the end of 2022, which would mean a total of 200 basis points (2.0 %) of rate increases at the next four scheduled meetings.

In March 2022, the median federal funds rate for 2022, according to its own forecast, was to be 1.9%. In 2023, they expect the median rate to be 3.8%, down from 2.8% in the March forecast.

It’s stealth hiking. Something that the markets are already sort of priced for. The yield on 2-year US Treasury bonds (which rose significantly last week) is now well above 3%, as is the yield on 10-year US bonds.

The challenge for central bankers is this: if commodity prices do not correct, all the responsibility for fighting inflation will fall on the central bank. The only tools they have are higher interest rates and tighter liquidity.

The FED expects an average fed funds rate of 3.5% over the next 2 years to be enough to bring inflation back to its 2% range with some growth sacrifices, but no major increase in unemployment. If that happens, great.

Long bond yields will fall and equities will tend to rise. That’s what they call a soft landing. Markets are currently priced for a soft landing scenario.

If it doesn’t happen like that, we will have problems. If PCE inflation (the FED’s measure) were to fall to just 4% in 2023 from current levels of 5.5%, this would force the FED to increase far more than current expectations and tighten its balance sheet to a faster pace. That would mean higher bond yields, weaker stocks, and an economy’s path to recession. A hard landing.

In equities, short-term concerns dominate. However, an increase in formal employment, a recovery in residential real estate, better control of agricultural prices and healthy corporate and bank balance sheets suggest that the medium-term cyclical recovery will continue despite short-term headwinds. . Stock market corrections will remain an opportunity to add to your long-term portfolio.

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Mahavir Kaswa, Head of Research – Passive Funds, Motilal Oswal Asset Management

Since the start of 2022, the Fed has been trying to reduce the money supply through aggressive rate hikes. Continuing on the expected path, the Federal Reserve decided to raise the interest rate by 75 basis points, bringing the federal funds rate back to a range of 1.5% to 1.75%. The 75 basis point rate hike is the highest since 1994.

Despite a hawkish move by the FED, the S&P 500 and Nasdaq 100 rose 1.4% and nearly 3% respectively, even the yield on 10-year US Treasuries fell 6 basis points to close at 3.44%.

Taking inspiration from the FOMC statement, we expect aggressive rate hikes going forward to ease inflationary pressures. However, Chairman J. Powell also noted that he does not expect a 75 basis point rate hike to be a common sight in the future.

Fed members are expecting rate hikes in the range of 175 basis points over the remainder of 2022. One way to look at this is a 75 basis point hike in July followed by 50 basis points and 2 X 25 basis points in the remaining three meetings. It will be prudent to recognize that the rapidly changing situation will guide the actions of the FOMC and be sensitive to new realities.

Pranjal Kamra – CEO, Finology Venture

The Federal Reserve raised the interest rate by 75 basis points, apparently the highest in about three decades. This came as no surprise considering the worsening inflationary pressure. While rising rates might help; the word has it, a “mild recession” is on the cards.

Vivek Goel, Co-Founder and Co-CEO, Tailwind Financial Service

In a dramatic shift in gear, the U.S. Federal Bank stepped up a rate hike of 75 basis points, the highest since 1994, while pledging to do “whatever it takes” to fight inflation .

Fed Chairman Jerome Powell acknowledged that the path to reining in inflation while maintaining the economy’s growth momentum “doesn’t get any easier. It becomes more and more difficult.
While the pace of the rise itself is aggressive, it was largely priced in by markets after Friday’s inflation data came out at record highs.

In addition to the upside, the Fed’s forecast – “the dot chart,” which in December showed federal funds rates barely above 1% this year, is now unanimous in forecasting levels over 3%.

With the next Fed meeting scheduled for July itself, there is a strong possibility of another 50 to 75 basis point hike, also acknowledged by the Fed Chairman.

This is in line with the commitment to bring inflation back to the 2% target and remarks about being very mindful of growing risks of higher inflation.

Interestingly, the statement from the previous Fed meeting stating that “the Committee expects inflation to return to its 2% target and the labor market to remain strong.” to say now “The

The Committee is firmly committed to bringing inflation back to its 2% target”. Clearly emphasizing that for now, their priority is to limit inflation.

While initial reaction from US markets was positive, two hours of trading after the announcement could be early to extrapolate market reaction.

Moreover, with a downward revision in GDP forecast for 2022 to 1.7% from 2.8%, fears around the recession should grow.

As a result, while the Fed expects a “soft landing” without a recession, it seems increasingly difficult to contain inflation without aggressive tightening, which is likely to have a greater impact on margins, cost of borrowing and aggregate demand.

Mohit Ralhan, Managing Partner at TIW Capital Group

Central banks around the world are trying to catch up with inflation and strive to get ahead of the curve.

The Fed’s 75 basis point hike and above all the 1.5% upward revision of the rate expected at the end of the year indicate that inflation is now winning the battle.

The Fed also drastically cut its outlook for economic growth in 2022 to 1.7% from 2.8% in March. The risk of recession in the United States has increased and the next two quarters will be extremely crucial.

Although the Fed expects inflation to decline in 2023, the effect of Fed actions on the broader economy remains uncertain. Markets are expected to remain quite volatile as it tries to find the balance between economic growth and high inflation.


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