Business Maverick: Stocks Knocked Down With Fed Walking a ‘Tightrope’

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US stocks hurtled toward a bear market, Treasury yields spiked to levels not seen in a decade and the dollar powered higher as speculation mounted that the Federal Reserve’s efforts to tame runaway inflation will plunge the economy into a recession.

Another brutal bout of equity selling pushed the S&P 500 more than 20% below its January record as bets rose that the Fed will have to raise rates more aggressively after Friday’s hot inflation reading. Highly valued technology shares bore the brunt of the rout, with the Nasdaq 100 slumping over 4%. The Cboe Volatility Index is pricing in more uncertainty in the here-and-now than it is in three months after a rare inversion of the futures curve.

Credit markets weren’t spared. Treasury 10-year yields climbed to the highest since 2011 while two-year rates jumped to levels last seen before the 2008 crisis. A closely watched part of the bond curve inverted as worries mounted that an aggressively restrictive Fed won’t be able to avoid an economic contraction. A measure of US credit risk surged to the highest since May 2020.

Financial markets are now bracing for the Fed to turn extremely hawkish after its meeting Wednesday. Traders are now pricing in 175 basis points of tightening by September — implying two half-point and one 75 basis points hike. If that comes to pass, it would be the first time since 1994 the Fed resorted to such an aggressive pace.

 

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