What’s next for the stock market after Fed rate-hike plans help spark rout

Investors will watch for another gauge of U.S. inflation in the week ahead after the stock market was rattled by the Federal Reserve ramping up its hawkish tone and suggesting large interest rate hikes are coming to get an overheating economy under control. 

“We’re probably seeing peak hawkishness right now,” said James Solloway, chief market strategist and senior portfolio manager at SEI Investments Co., in a phone interview. “It is no secret that the Fed is way behind the curve here, with inflation so high and so far only one 25 basis-point increase under their belt.”

Fed Chair Jerome Powell said April 21 during a panel discussion hosted by the International Monetary Fund in Washington that the central bank isn’t “counting on” inflation having peaked in March. “It is appropriate in my view to be moving a little more quickly,” Powell said, putting a 50 basis-point rate hike “on the table” for the Fed’s meeting early next month and leaving the door open to more outsize moves in the months ahead.

U.S. stocks closed sharply lower after his remarks and all three major benchmarks extended losses Friday, with the Dow Jones Industrial Average booking its largest daily percentage drop since late October 2020. Investors are grappling with “very strong forces” in the market, according to Steven Violin, a portfolio manager at F.L.Putnam Investment Management Co.

“The tremendous economic momentum from the recovery from the pandemic is being met with a very rapid shift in monetary policy,” said Violin by phone. “Markets are struggling, as we all are, to understand how that’s going to play out. I’m not sure anyone really knows the answer.”

The central bank wants to engineer a soft landing for the U.S. economy, aiming to tighten monetary policy to fight the hottest inflation in about four decades without triggering a recession.

The Fed “is partly to blame for the current situation as its exceedingly accommodative monetary policy over the last year has left it in this very tenuous position,” wrote Osterweis Capital…


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