US stock market plunges on recession fears after Powell’s Jackson Hole remarks

Federal Reserve Chairman Jerome Powell’s remarks during the Jackson Hole Economic Policy Symposium 2022 were a jolt from the blue for the market. Dow 30 had crashed by over 1000 points while the Nasdaq lost 4.10% by the time the market closed on Friday last week. On Monday also, the US stocks are trading lower and all indices are in red. S&P 500, Dow 30 and Nasdaq 100 are lower by 0.82%, 0.75% and 0.56% respectively.

Taken together, Dow 30 has already shed over 1200 points since August 26, the day the Fed chief delivered the hawkish comment.

While many may argue that the decision to tackle inflation came too late from the Fed, the chief made it clear in his Jackson Hole speech that interest rates may continue to remain elevated for some time to come. What he also warned about was the impending danger to the economy – “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,”

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While conceding that this could result in slower growth and softer labour market conditions, the Fed Chair hinted at additional rate hikes in a highly anticipated speech to combat inflation. In addition, he said that despite market expectations for relaxing monetary policy next year, rates are likely to stay high for a while.

The yield curve inversion deepened when the US 2Y yield rocketed up significantly to its highest level since November 2007.

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The concept of a Federal Reserve shift that may endanger its fight against inflation was shot down as Jerome Powell gave a stern warning that rates will likely stay high for some time. The impact on the economy because of higher rates for a long time may prove to be detrimental. Stock markets are already pricing in future rate hikes but what is still unknown is the peak inflation number and how badly the economy is going to be hit. Will there be an offical recession in US remians to be seen as the GDP grwoth rate in the previous two quarters already showd a decline?

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