The Magazine for Asian Investors
That’s how fast it can go back. At the end of last week, the gold price was still on the verge of exceeding the $2,000 mark. But then it went back down 1.29% to $1,932.50 per ounce on the last day of the week.
What could we learn this week? – 2 Takeaways from this week
Fed Interest Rate Stories
Federal Reserve Chairman Jerome Powell made it clear Thursday at an IMF-sponsored discussion that a 50 basis point rate hike is on the table at the next FOMC meeting. He made clear that the Fed’s top priority is to bring inflation down and restore price stability without triggering a recession. The markets showed once again on Friday how fragile the structure is and how much influence the Fed’s loose monetary policy has on the stock markets. The DOW closed down nearly 1000 points on Friday, down 7% for the year. The S&P 500 is down 10% for the year and the Nasdaq is down 18%.
Friday’s sell-off, meanwhile, came as a surprise, given that Fed officials had already made several advance calls for a 50 basis point rate hike at the next meeting. The markets apparently should have already expected this, shouldn’t they? It is possible that one had probably assessed the markets more reasonably than they ultimately are, it could be, after all, that one always relies on the good old Fed horse that comes to the rescue when the ship wobbles.
Even though the Fed’s statements can still move the markets, this assessment may not be so far-fetched.
Whether the Fed can really fight inflation as aggressively as it does in its statements is open to doubt. Especially since the immensely high debt mountain of the United States does not want to be burdened with too high an interest burden, since in such case insolvency could well be imminent. Moreover, one must assume that even if the U.S. economy looks strong at the moment, COVID is still an issue (see China), and there is war in Europe. Both of these issues, which Powell is also aware of, could hurt the U.S. economy and cause a rethink at the Fed.
Nevertheless, it is to be expected that the Fed will stick to its plan for the time being and allow interest rates to rise further. How far, no one can say at the moment, and probably depends on market conditions. With a Fed that wants to fight inflation, more downturn is to be expected, especially in the stock markets. Investors should take this into account for their investments.
Markets are not set for Fed tightening
The movement of the stock markets on Friday (April 22, 2022) was a surprise after all but arguably indicates that the markets are probably not as ready for a faster rate hike as previously thought. It has not been difficult to observe in recent years that the markets have been lifted from one high to the next by the Fed’s loose monetary policy. As soon as the Fed tried to pull back on the easing, the markets responded with a downturn. Powell’s words on Thursday were nothing new, as several Fed officials have been talking for weeks that inflation has risen too much and a higher rate hike is an appropriate measure to counter that. The downturn in the markets has already begun since the Fed started raising rates earlier this year. Several tech names have lost 50% or more of their value. Netflix was also hit on Friday, which was also due to the company’s numbers.
Retail investors may face an important realization this year, and that stocks don’t just go up after all. A major downturn in the markets, which can also lead to a stock market crash, could have a rude awakening for investors. In this case, everything will go down including gold and other safe havens.