The current inflation rate has Wall Street in chaos as the stock market continues to be driven further down. With inflation at its highest in decades and stock market prices crashing, people aren’t just worried about a recession, they’re fearing depression. Experts say that there is no easy way out of this, and that it will only get worse before it gets better.
Stock Market On The Verge Of Collapse As Inflation Continues To Grow
This past Tuesday, the United States government released an inflation report. It was not good news, showing that inflation rates were even higher than expected, hitting 8.3% in August. Any hopes that people had for the Federal Reserve easing off of continued interest rate hikes were dashed. The Stock Market, in turn, responded as it often does: It dropped – heavily. (1)
The Dow Jones Industrial Average fell 1,276.37 points. The New York Stock Exchange fell 3.9%. The Nasdaq also suffered, dropping more than 600 points, or 5.2%, and the S&P 500 took a 4% hit. Meanwhile, bonds, oil, and gold also dropped considerably. It was the worst day for stocks since June 2020. All of this is happening because investors are worried about an expected 0.75% interest rate increase. This would be the third time in a row that the Federal Reserve will have done this. As prices continue to rise, the Federal Reserve will continue to raise interest rates. (2)
No More “Soft Landing”
Previously, the Federal Reserve has spoken of its plan to raise interest rates without pushing the economy further into recession. The ever-increasing inflation rate, however, is making investors afraid that they won’t actually be able to achieve that. Chris Zaccarelli, chief investment officer at Charlotte-based Independent Advisor Alliance, says the key lies in the labor market.
“As long as unemployment is extremely low and consumers are confident in their spending, it’s hard to imagine a scenario where the inflation problem resolves itself,” he explained. “The Fed has the worst problem in the world — it’s a political problem, not an economic problem — and the only cure for the current crisis is one that is politically infeasible,”
The problem that Zaccarelli is talking about is choosing between pushing the country into a scenario where unemployment is high versus one where this inflation problem continues to rage on. The amount of criticism the Federal Reserve will face if they do this, which seems to be the only real way to solve the inflation problem, will be very intense. Zaccarelli says that it won’t just cause a recession, but a very bad one.
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Trying to Achieve Stable Prices
Achieving stable prices and slowing down the inflation rate is no easy task. Charlie Ripley, a senior investment strategist for Allianz Investment Management in Minneapolis, says that the only way for the Federal Reserve to do that is to hike up the policy rate. He says that they will have to bring the policy rate up over 4% in order to achieve their stable price goal. Ripley says that investors should brace themselves for higher rates for a longer period of time.
Meanwhile, prices just keep rising. From August 2021 to the end of August 2022, core prices went up 6.3%, and the CPI’s food index rose 11.4%. This is the largest year-over-year increase in that food index since May of 1979. Housing, medical care, rents, furniture, and new cars all became more expensive. The worst part is that, as already mentioned, there are no signs that this will slow down anytime soon. Chair of the Federal Reserve Jerome Powell said that he is “strongly committed” to bringing down inflation rates. This is why investors are speculating that another big hike in interest rates is coming in September. That would make it the fifth increase this year. (3)
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Are We In A Recession?
Investors say that it is too early to know whether or not we are in a recession. The technicalities of the definition of a recession, of course, don’t matter much to the general public. So far in 2022, Americans (and people around the world) are dealing with higher prices of pretty much everything, increasing interest rates, and more job layoffs. Whether we are “technically” in a recession or not doesn’t change their situation.
Linda García, the founder of In Luz We Trust, a financial community geared toward Latinx investors, says that despite all of this, it is actually a good time to start investing if you haven’t already. The market is in “reset mode”, which is like a green light to invest. She says stick to your plan and keeps investing – that the ups and downs are just a natural part of the investing cycle.
“This is a really great opportunity for folks to either start learning about the market, start participating, or continue to be diligent in their monthly investments into the stock market,” says Garcia. “It’s just temporary at the end of the day,” says García. “And five to 10 years from now, we’ll be looking at this moment and be like, ‘Why didn’t we buy more?’”
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- “Inflation hits 8.3% in August — worse than expected — as core prices spike.” NY Post. By Thomas Barrabi. September 13, 2022.
- “Dow falls more than 1,200 points on worse-than-expected inflation report.” NY Post. Ariel Zilber. September 13, 2022.
- “Stocks Had Their Worst Day Since June 2020 on Tuesday, and Experts Predict a Rocky September. Why You Should Keep Investing.” Time. Mercedes Barba and Harlan Vaughn. September 14, 2022.