Wall Street falls, worried about inflation and the prospect of a rate hike

Wall Street falls, worried about inflation and the prospect of a rate hike

Animal lovers know it: the bull gores its victim and sends it flying in the air, while the bear lowers its big paw to bring down its prey. So it is with the financial markets, which are bull (“bull”) when they ascend, and bear (“bears”) when they fall for a long time. Monday, June 13, Wall Street resolutely entered a market bear, bearish, with a decline since the beginning of the year of more than 20% for the S&P 500, the index which reflects the large American companies, while the Nasdaq, the index rich in technology continues its crash, with a decline by 30%. At the start of the morning, the two indices lost 4.15% and 3.6% respectively. By 10:30 a.m., no values ​​for the Dow Jones, SP500 or Nasdaq100 were up.

The trigger was the very bad inflation figure, published on Friday June 10, with a general increase in prices of 8.6% over one year, in May, and a collapse in consumer morale to an unprecedented level, even during the great financial crisis of 2008. Operators make a fourfold calculation: the Federal Reserve (Fed, American central bank) will have to raise its interest rates much more than expected to counter inflation; the country will most likely enter into recession, with the end of fiscal and monetary stimuli; corporate profits will decline, with a high and lasting cost of raw materials and energy; and consumers who will have to tighten their belts, when they have spent the savings made during the Covid-19 pandemic.

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The Fed has objectively failed in its mission, which is to maintain full employment and price stability. By focusing too much on the first objective, while the job market has been overheating for months, it has let prices slip away. The political stakes are not foreign to this, Democratic President Joe Biden having delayed, in the fall of 2021, to renew the mandate of Jerome Powell, a moderate Republican, including the left of the Democrats, in particular the Senator from Massachusetts Elizabeth Warren, would not.

Massacred speculative values

Traders end up demanding that the Fed act firmly, to put behind the bad news. Thus, the institution’s monetary committee, which meets on Tuesday June 14 and Wednesday June 15, will decide on a rate hike. At least half a point, maybe 0.75%, which would lead to a doubling of the cost of money in the short term (key rates are currently between 0.75% and 1%).

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