Why Is the Market Going Down?

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The big question on everyone’s mind is, why is the market going down? The answer, in short, is interest rates. Interest rates are up. When rates go up, stocks tend to go down. And this takes us to the next question: why are interest rates up—and will they continue to rise?

New View from the Fed

In the short term, the answer seems to be yes.Last Friday, Fed Chair Jerome Powell spoke at the annual Jackson Hole central banking forum. His prepared remarks reinforced the Fed’s current view that restrictive monetary policy will need to be in place for some time in order to combat inflation before we start to see easing policy and lower rates.

In other words, Powellwas quite clear that the Fed intends to get inflation under control and that it will keep hiking rates, even as the economy moves into a recession. This is new.

Before last week’s speech, markets were pricing rate hikes through March of next year, but then rate cuts shortly thereafter. After Friday’s speech, though, markets are now expecting those rate cuts to be delayed until at least the second half of 2023. Markets were counting on limited rate increases and quick rate cuts. The speech was clear, however, that the increases will be larger, and the cuts more delayed, than anyone expected.

That’s why rates have risen. The rate on the 10-year U.S. Treasury note rose from about 2.6 percent at the start of the month to over 3.1 percent as of this writing. That is a big jump, especially over a short time period, which has hit the stock market hard for several reasons.

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