Stocks Plunge as Inflation Fears Grip the Market: What's Next?

In a disturbing inflation report, financial markets have experienced a significant upheaval, with bond yields rocketing and stock values plummeting.

by Faruk Imamovic
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Stocks Plunge as Inflation Fears Grip the Market: What's Next?
© Getty Images/Spencer Platt

In a disturbing inflation report, financial markets have experienced a significant upheaval, with bond yields rocketing and stock values plummeting. This latest economic data has sparked renewed concerns about a potential U.S.

recession—a scenario that some analysts believe could be a strategic choice by the Federal Reserve to manage inflation. Ian Lyngen, the head of U.S. rates strategy at BMO Capital Markets, shared his insights with Bloomberg TV, indicating a grim outlook.

"If we continue to get inflation prints at these levels, the Federal Reserve will find itself backed into a corner where they need to cause a recession if they're going to hold that 2% inflation target," Lyngen explained.

His comments came in the wake of the consumer price index for March, which registered a 3.5% increase on an annual basis—surpassing the forecasted 3.4% and exceeding the inflation rates of both January and February.

Market Reactions and Federal Reserve Strategies

The anticipation of a Federal Reserve pivot on interest rates has been thwarted by the persistent high inflation. Previously, market participants had hoped for a rate reduction beginning as soon as June.

However, current sentiment has shifted, with a majority now viewing September as a more likely time for the Fed to start easing, albeit with less than a fifty percent probability, as per the CME FedWatch Tool. Lyngen further notes that the current fed funds rate of 5.25% to 5.50% might not be stringent enough to curb inflation, echoing the sentiments of other economic experts who suggest that the Fed may need to implement additional rate hikes.

Frances Donald, chief economist at Manulife Investment Management, who also appeared in the Bloomberg interview, concurred with this view. "Now that we're back to an environment where we're losing those embedded rate cuts, we actually have to increase the chance of something bad happening here," Donald cautioned, implying that interest rates might remain elevated until economic pressures force a change.

Amidst these discussions, some experts, including leading economist Mohamed El-Erian, advocate for a recalibration of the Federal Reserve’s inflation target to 3% to mitigate these risks. El-Erian warned that maintaining the current interest rate policy for an extended period might be necessary for the Fed to achieve a 2% inflation rate.

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