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Powell has pretty much sealed the fate of the short-term stock market

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For the third consecutive time, the US Federal Reserve raised the Fed Funds rate by three-quarters of a percentage point, bringing the overnight interest rate between 3.00% and 3.25%.

Earlier this year, that percentage was almost 0%.

Fed Chair Jerome Powell indicated that while it was not his goal, a recession may be necessary to tame inflation. “There is a very high probability that we will have a period of … much lower growth,” Powell said in comments following the rate hike announcement.

Powell’s focus is clearly on inflation. With two more meetings to go this year, the Federal Open Market Committee’s dot plot shows more gains to come. The FOMC is expected to close the year at 4.4%. We could look at an additional increase of the same amount in early November, followed by a half percentage point increase in mid-December.

The good news is that this could be the end. The dot plot indicates a rate of 4.6% next year, slightly above the expected year-end 2022 figure of 4.4%.

The bad news is that, based on current forecasts, interest rates aren’t expected to fall until 2024.

Powell’s comments almost sealed the short-term fate of the stock market. Just last week I indicated that a retest of 3700 on the S&P 500 was at stake. While futures continued to fall after Wednesday’s close, the large-cap index was less than 100 points away from that figure.

The S&P 500 remains well below its key 50-day (blue) and 200-day (red) moving averages. The index has not closed above the 200-day moving average since April 8.

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We have referenced “3700”, but the actual support area is slightly lower, a range between 3655 and 3686 (shaded in yellow). If the price can penetrate that yellow area, we could hit an air pocket. More sellers could be attracted as the S&P 500 has hit a new low for the new year.

A sharp move lower could lead to capitulation. Fears will rise along with the volatility index, and heavy selling may follow. Intraday, a long red candle can turn into a wick as buyers look for bargains and try to catch a bottom.

Keep in mind that while everyone is talking about interest rates, there is also quantitative tightening. This program reduces the Fed’s balance sheet by $9 trillion and is another anti-inflationary measure.

This month, the Fed increased its quantitative tightening rate to $95 billion a month — as you can read here awesome real money article concerning this.

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