The stock market is choppy Tuesday morning as the Federal Reserve meets for its scheduled policy meeting. The central bank is likely to increase interest rates by another 75 basis points, but some analysts think it could institute as much as a 100-basis point hike. While the Fed wants to curtail inflation, its moves can be damaging for the broader economy.
Analysts are worried that the Fed doesn’t care much about what happens to corporate stocks or investor interests. At the end of the day, the Fed serves the US government, which ostensibly answers to the will of taxpayers. Fed Chair Jerome Powell has noted in the past that “[t]here could be some pain involved in restoring price stability.”
Investors are in for more surprises as earnings reports for the third quarter begin to roll out. First, FedEx stunned investors by indicating that it will badly miss its earnings targets this quarter, owing to increased competition from Amazon and lower consumer demand amid persistent inflation. Now, American automaker Ford has warned investors that it will also likely miss its third-quarter earnings after vendor inflation has dramatically spiked the price of car parts.
Stock Market Falls Again
The stock market isn’t reacting well to the Federal Reserve’s quantitative tightening policy. More expensive borrowing costs, slower demand for loans, and an overall gloomy economic outlook have all contributed to slowing the stock market. “A third ‘unusually large’ hike would be a reversal from the plan Chair Powell laid out in July to slow the pace of tightening, despite little surprise on net in the data,” Jan Hatzius and other economists at Goldman Sachs explained in a note Tuesday.
The S&P 500 dropped off by 1.2% Tuesday morning, and the Dow Jones Industrial Average dropped nearly as much, hovering around a 1.3% drop shortly after the start of trading. The tech-heavy Nasdaq Composite saw roughly 0.9% of its value vanish Tuesday morning.
Ten-year US Treasury bond yields are still far above 3.5%, which is the highest they’ve been since 2011. Inflated Treasury bond yields can be a bad sign for the health of the economy, as they suggest that investors are lacking in confidence in the market. The two-year Treasury yield, meanwhile, is at nearly 4%, a concerning sign for economists.
Federal Reserves Knows This Might Hurt
Chair Powell has used the word “pain” to describe the effects the Fed’s tightening strategy will have on the economy several times. The central bank’s leaders are aware that their efforts to keep the dollar’s value high will necessarily slow the economy and hurt both businesses and workers–but they hope that these are short-term aches.
After all, runaway inflation is extremely devastating for any economy. When individual units of currency fall in value and businesses keep increasing their prices, the average working-class consumer’s purchasing power drops dramatically. This can result in economic depressions that threaten to shutter businesses and could lead to “death spiral” patterns that make inflation worse as businesses and banks try to create more wealth.
“Over the course of this year, financial markets have responded and have generally shown that they understand the path we’re laying out,” Powell noted back in June when the stock market fell in response to the most recent interest rate hikes. As long as inflation continues to remain high, the Fed will continue to make decisions that run counter to the interests of the stock market.
Ford Profits Miss by a Wide Margin
US automaker Ford Motors is going to miss its earnings projections for this quarter by nearly $1 billion. This massive miss is almost entirely due to inflation causing parts suppliers to increase their prices, leading to Ford overspending on its usual parts orders. Shares of Ford dropped on the news, as did shares of GM and Tesla, sympathetically reflecting their competitor.
“Vehicles in transit will be seen as transitory, but surprise inflation is always worrying,” notes Evercore ISI analyst Chris McNally. He’s not alone in calling the situation “worrying,” either. “Though the Q3 guide-down doesn’t affect fiscal year guidance, the surprise $1 billion headwind [and] now greater reliance on a strong Q4 will likely weigh on the shares,” says Citi analyst Itay Michaeli.
Bizarrely, the company also adjusted its year-end operating profit outlook, claiming it would now make $12.5 billion instead of $11.5 billion. This seemingly runs counter to the narrative that soaring parts costs are hurting the company’s bottom line, but apparently, Ford expects these issues to clear up toward the end of the year. The headline, however, is that there are more costs in the economy than some businesses expected, and inflation will continue to have consequences for the foreseeable future.