Stocks and cryptocurrency have entered bear market territory as a result of the Federal Reserve’s relentless interest rate rises, but economists are concerned about what would happen if inflation continues beyond the “target range.”
As the economy continues to deteriorate, financial experts across the world are increasingly pinning the blame on the US Federal Reserve, which was hesitant to respond to growing inflation early on.
Financial markets are now suffering from their greatest run of losses in recent memory, and there appears to be no end in sight. The Nasdaq, which is heavily weighted in technology, fell another 2% on May 24, while Snap, a popular social media business, lost 43.1 percent of its market valuation in trading on May 23.
Much of the current instability can be traced back to the Federal Reserve, which has launched a quest to raise interest rates in order to bring inflation under control, regardless of the financial markets.
Unfortunately for short-term investors, economist Alex Krüger believes that “the Fed will not cease tightening unless markets crash or inflation falls significantly and for several months.”
The fact that the Fed has yet to define what inflation would have to look like for them to take their foot off the rate-hike gas pedal is one of the primary challenges influencing traders’ psyches. Instead, it simply restates its objective of “seeing clear and persuasive evidence that inflation is falling down” toward its 2% target.
To reach its aim of lowering inflation down to the 4.3 percent –3.7 percent range by the end of the year, the Fed will “need to see Y/Y [year-over-year] inflation decline 0.25 percent –0.33 percent on average every month through September,” according to Krüger.
If the Fed fails to hit its PCE inflation target by September, Krüger cautioned that “more rises *than what’s priced in*” might be implemented, as well as the potential of selling mortgage-backed assets as part of a quantitative tightening campaign.
Bill Ackman, a billionaire investor and hedge fund manager, mentioned the Fed’s role in current market circumstances, saying, “The only way to reverse today’s roaring inflation is with dramatic monetary tightening or with a collapse in the economy.”
The Fed’s delayed response to inflation has harmed the Fed’s reputation, according to Ackman, and its present policy and direction “are setting us up for double-digit persistent inflation that can only be prevented by a market collapse or a big hike in rates.”
Due to these considerations, demand for stock exposure in 2022 has been subdued, as indicated by recent stock price declines, particularly in the tech sector. The tech-heavy Nasdaq index, for example, is currently down 26% year to date.
Because the cryptocurrency industry is so tech-focused, it’s not unexpected that weakness in the tech sector has translated to weakness in the crypto market, a pattern that may continue unless excessive inflation is addressed.