Stocks Nudge Higher Ahead of Federal Reserve Announcement

The Fed's decision will come out later today. In the meantime, the stock market is slightly up and investors seem hesitant to make any big moves.

The stock market has been choppy this week ahead of the Federal Reserve’s announcements regarding its recent policy meeting. The Fed met yesterday and this morning to discuss another interest rate hike. These hikes have resulted in a troubling housing market for sellers, lower corporate stock prices, and more headaches for investors. Ostensibly, this quantitative tightening policy should bring the inflation rate down as demand in the economy cools off.

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Naturally, the stock market and investors have had other plans. Shareholders don’t like to see numbers go down, so the stock market has tried to remain resilient through the storm of negative headlines coming from the Federal Reserve. This has only strengthened the central bank’s resolve to crush demand and push the dollar back to its target of 2% annual inflation. 

Read More: Check out the latest Mind Your Dollars stock and financial news.

Meanwhile, the economy is doing some strange things in response to this tug of war. For instance, the two-year Treasury bond yield has topped 4% for the first time since 2007, a concerning signal that the US might be on track for another recession. Financial experts have warned that a recession could be looming since the start of the year, as persistent inflation and skyrocketing interest rates wreak havoc on the economy. 

Stock Market Shaky but Up Before Fed News

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Wednesday is going to be a big day for the stock market as investors will find out just how much of an interest rate hike the Fed wants to implement. In the meantime, things are quiet and slightly up on the stock market. Analysts have little to digest this morning aside from some jitters over whether the Fed will implement a full percentage point interest rate hike or the expected 75-basis point hike. 

The three major indexes are a bit higher this morning, with the S&P 500 jumping 0.5% early this morning. The Dow Jones Industrial Average led the gains, adding 0.6% shortly after the start of trading. Meanwhile, the tech-heavy Nasdaq Composite saw the slimmest increase, gaining only 0.4% ahead of the Fed announcement. 

“The meeting-by-meeting and data-dependent approach that central banks around the world have adopted will allow for some easing in the pace of monetary policy tightening in the coming months, but central bankers have warned that such action would only happen if, and when there is compelling evidence of inflation cooling,” writes Gregory Daco, the chief economist at EY Parthenon.

Fed Policies Guaranteed to Hurt Some Part of the Economy

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No matter what the central bank’s leaders say, there’s no way for the Fed to bring inflation down without hurting someone. If inflation is left unchecked, the average working-class American will see their purchasing power diminish rapidly. If the Fed implements harsh interest rate hikes, it could be troublesome for Wall Street investors and home buyers alike.

“We understand how painful it is, particularly for people who are living paycheck to paycheck and spend most of that paycheck on necessities, such as food and gas. And heating their homes. And clothing and things like that,” Fed Chair Jerome Powell noted after the bank’s policy meeting back in July. “We do understand that those people suffer the most.” And, in truth, no matter what the Fed does, the poorest workers will feel the worst effects.

The issue is double-edged. On the one hand, interest rates going up will help to bring the dollar’s value higher, which will preserve workers’ purchasing power. On the other hand, it will also make things harder in the labor market, as a slower economy will result in layoffs–thus harming the poorest people in the country again. It’s a lose-lose scenario for working-class people.

Treasury Yields Astonish Analysts

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Meanwhile, the two-year Treasury bond yield is above 4% for the first time in 15 years. Likewise, the ten-year Treasury note is just over 3.5%, flirting with its highest value ever. These are concerning signs for the overall health of the economy. Typically, bond yields only get this high shortly before a market recession.

“Relative safety I would look at the front-end of the U.S. Treasury curve. You’ve got the 2-year treasury yielding just about 4%. It’s gone up enormously,” muses Michael Schumacher, head of macro strategy at Wells Fargo Securities. “If you think about the real yield, which a lot of people in the bond market focus on, it’s probably not a bad place to hide out.” In this case, investors are “hiding out” from the recent market instability that has made corporate stocks an uncertain gamble.

With the Fed’s decision looming later today, investors are just looking for any sign of stability. It’s hard to say how long this pattern will continue, but the Fed has indicated that it’s dedicated to a long inflation battle and will implement any steps it deems necessary to hit its target inflation rate of 2%.

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