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Federal Reserve officials on Thursday repeated their calls for tough policy to combat stubbornly high inflation — fueling expectations of further interest rate hikes amid a stock market sell-off that has seen major indexes reach new lows for the year — and some analysts expect losses could deepen further. .

key facts

Real interest rates, which have been negative since July 2020, “should be in positive territory and stay there for some time,” Loretta Meester, president of the Federal Reserve Bank of Cleveland, told CNBC Thursday morning, lamenting that inflation remained high. And she warns that the Fed still has room for that. Raise rates further: “We’re still not even in a restricted money rate territory.”

In a speech Thursday, St. Louis Fed President James Bullard issued a similar hawkish call, saying that it “appears” that the Fed “expects a reasonable amount of additional action this year” to put “meaningful” downward pressure on inflation.

Expectations of a rate hike rose amid the comments, with markets pricing on Thursday a year-end rate of 4.5% — above the 4.4% rate Fed officials had forecast earlier this month, which itself was one percentage point higher than forecasts in June. .

“The gloom is back, it’s even worse than ever,” analyst Adam Crisavoli of Vital Knowledge Media said in a note as stocks tumbled Thursday, adding that markets may rebound as they did earlier this week, but S&P You will struggle to climb. Back above 3900 (7% above current levels) until the Fed’s outlook – which is dependent on lower inflation – improves.

In a note, Morgan Stanley analyst Michael Wilson said the company remains “convinced” that Standard & Poor’s will eventually bottom out between 3,000 to 3,400 points later this year or early next year, suggesting it may It drops another 7% to 18%.

Analysts at Goldman Sachs and Bank of America are slightly less bearish as they expect the S&P will only fall to around 3600 (in line with current levels), although Goldman also indicated that the index could fall back to 3150. If the economy falls into a recession.

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“The Fed is signaling that it expects monetary policy to tighten enough to trigger a recession,” says Bill Adams, chief economist at Bank of Comica. He notes that economic data released on Thursday boosted the possibility of a 75 basis point rate hike at the Federal Reserve's November meeting. Data from the Bureau of Economic Analysis showed that the economy grew 1.5% more since the start of the recession than previously known, and jobless claims fell unexpectedly last week.

What to watch

Economists at Goldman Sachs expect the Fed to raise interest rates by another 75 basis points in November, 50 basis points in December and 25 in February. However, inflation data due on Friday and labor market releases scheduled for next week could certainly push these expectations higher again.

main background

Inventories have been declining since August when Fed officials indicated in the meeting minutes that they may need to act more aggressively in order to cool inflation. The S&P is down 24% this year, and the Nasdaq 312 has collapsed. In a note to clients, Keith Lerner, chief market strategist at Truist Advisory Services, said the Fed would likely keep interest rates high for longer in order to offset inflation. Challenges that have persisted for more than a year — “even if it requires more economic pain,” officials have increasingly warned since last month.

in-depth reading

Dow drops 500 points as markets plunge after wave of worrying economic data (Forbes)

Technical Recession Confirmed: Economy Shrinked 0.6% Last Quarter, Final GDP Show (Forbes)