Stock markets drop as Wall Street takes a gloomy view of the economy
The Dow Jones Industrial Average is in a bear market, as stock markets continue their weeklong plunge.
Wall Street is digesting the Federal Reserve's warning that more interest rate hikes are coming, as it embraces a gloomy view of the U.S. economy's future, where a recession seems more likely.
The Dow fell more than 700 points, or 2.3%, on Friday, to its lowest level since November 2020. After falling for five days in a row, the index is on track to close the week 1,000 points below where it started. The Nasdaq and the S&P 500 were also down more than 2.5% each.
Stock markets, as well as those for bonds and commodities, have been reckoning with the Fed's announcement this week that it will continue to raise interest rates until surging inflation is under control, regardless of the risks of a recession.
Already this year, the central bank has hiked rates at a speed and magnitude not seen for a generation, in the hopes of slowing down the worst inflation the country has experienced in 40 years.
Most Americans have hoped for a "soft landing," where the Fed's steps to stabilize prices brought about only a slight economic decline. But Fed Chair Jerome Powell made it clear on Wednesday that the economy could experience a "hard landing" of a severe downturn.
"No one knows whether this process will lead to a recession or if so, how significant that recession would be," Powell said at a news conference after the Fed announced it was raising interest rates by 0.75% for the third time in a row.
"Nonetheless, we're committed to getting inflation back down to 2% because we think that a failure to restore price stability would mean far greater pain later on. "
Powell's comments and a bleak outlook from FedEx, the multinational company heavily connected to the world's supply chains, have created confusion about the future, with Goldman Sachs analyst David Kostin describing the economic outlook as "unusually murky."
"The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux," Kostin wrote on Friday.
"Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook," he also wrote.
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