Stock Market Swings After Inflation Fuels Uncertainty Over Fed Rate Hikes

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Stocks stumbled Tuesday after data revealed inflation isn’t slowing down as quickly as economists expected—ushering in volatility that many experts predict will only continue in the coming months, as uncertainty over rising prices and Federal Reserve policy continues to fuel investor fears of a potential recession.

Stocks swung yet again Tuesday.

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Key Facts

Consumer prices rose 0.5% from December to January, according to Labor Department data released Tuesday, gaining at a faster pace than economists forecasted and throwing a wrench into Wall Street’s hopes that the Federal Reserve would further ease its interest rate hike plans in its campaign to slow inflation.

The Dow Jones Industrial Average subsequently fell as much as 420 points, or 1.1%, before paring losses to fall just 130 points by market close while the S&P 500 fell .03% and the tech-heavy Nasdaq dropped rose 0.6%.

Oanda analyst Edward Moya dubbed the moves another “inflation rollercoaster” in a Tuesday note to clients, explaining “disinflation trends” allowing the Fed to slow its roll are “in danger.”

Stocks have indeed endured numerous turbulent rides upon the CPI’s monthly reading: The Dow has moved an average of 1.8% on the last 10 CPI release dates, about double the 0.87% average movement during the 180 non-CPI trading days during the timeframe, according to a Forbes analysis of market data.

In fact, CPI release days accounted for four of the Dow’s eight largest daily swings over the last 10 months, including the Dow’s 3.9% decline on September 13, the biggest loss of 2022.

Key Background

Stocks have been unusually volatile in recent years due to a variety of geopolitical factors, including the government’s response to the Covid-19 pandemic and the ongoing war in Ukraine. Covid-related supply chain disruptions and a global rise in commodity prices—fueled by Russia’s invasion of Ukraine—each contributed greatly to surging inflation. Since March 2022, the Fed has hiked its target interest rate from 0% to 0.25% to 4.5% to 4.75%, hitting the highest level since 2007. All three major stock indexes subsequently endured their worst annual performance since 2008 last year as higher borrowing costs cut into corporate profits.

Crucial Quote

“Swings reflect the fact that the inflection points we anticipate in inflation, monetary policy, and growth have not yet been reached,” UBS’ Mark Haefele wrote in a Tuesday note to clients. “Investors should expect continued volatility for now due to uncertainty” in inflation and employment data, the two primary components in the Fed’s assessment of the economy, Haefele added.

Surprising Fact

Less than a quarter of the roughly 300 investment fund managers surveyed by Bank of America last week said they expect a recession over the next 12 months, down from 77% in November and hitting an eight-month low.