After Central Bank Announcements, Investors Fear Recession and Crash Markets

On Wall Street, stock prices sharply fell on Thursday for the second consecutive day, as investors fear that the aggressive tightening of monetary policy by the U.S. central bank will plunge the economy into recession.

The Dow Jones slid 2.25 percent to 33,202 points, while the S&P 500 dropped 2.49 percent to 3,895 points, and the Nasdaq index fell 3.23 percent to 10,810 points.

The largest daily decline of these indices since early November is a result of the Fed’s continued firm stance on combating inflation. The Fed did slow the pace of interest rate hikes on Wednesday, but estimates from central bank officials indicate that rates will be raised to higher levels than previously expected and will remain at those levels longer than anticipated.

Central bank officials estimate that the terminal interest rate, at which the cycle of rate hikes will stop, will reach 5.1 percent, while they had expected 4.6 percent in September. This means that the Fed will continue to raise rates next year by a total of 0.75 percentage points, in a range of 5 to 5.25 percent.

After a 0.50 percentage point increase on Wednesday, the key rates are now in the range of 4.25 to 4.50 percent, their highest level in the last 15 years.

At the beginning of the week, stock prices were rising as investors hoped that the cycle of rate hikes would end at lower levels, below five percent. They also hoped that the Fed might start lowering rates by the end of next year.

However, it seems that this will not happen as Fed officials have indicated that they expect a reduction in interest rates only in 2024, by one percentage point.

– It’s not just about what the Fed did on Wednesday, but also what it communicated. And it is clear that it remains concerned about inflation and this is not the end of the rate hike cycle. We will have to wait for new inflation indicators – says Melissa Brown, director of research at Qontigo.

European Markets Also Decline

Due to the increase in interest rates, economic growth is slowing down. The Fed estimates that the gross domestic product (GDP) will grow by 0.5 percent next year, as it did this year, but officials from several major U.S. banks have indicated in recent days that the economy could plunge into recession next year.

Fears of recession have been heightened by the fact that yesterday both the European and British central banks raised interest rates by 0.50 percentage points. From the regular meeting, officials from the European Central Bank also indicated that a further significant increase in rates will be necessary to curb inflation.

As a result, stock prices on European exchanges sharply fell yesterday. The London FTSE index weakened by 0.93 percent to 7,426 points, while the Frankfurt DAX plummeted 3.28 percent to 13,986 points, and the Paris CAC fell 3.09 percent to 6,522 points.

On Asian exchanges on Friday, stock prices also fell, just like on Wall Street the day before, as investors fear recession, given that central banks are announcing further increases in interest rates to combat inflation.

The MSCI index of Asia-Pacific stocks, excluding Japan, was down 0.8 percent around 7:00 AM, on track for a weekly loss of more than 2 percent.

This morning, the Nikkei index on the Tokyo Stock Exchange slid 1.9 percent, while stock prices in Hong Kong, Shanghai, South Korea, and Australia fell between 0.1 and 0.8 percent.

Thus, Asian markets are following yesterday’s decline on Wall Street for the second consecutive day. The Dow Jones slid 2.25 percent, while the S&P 500 fell 2.5 percent, and the Nasdaq index dropped 3.2 percent.

Dollar Strengthens, Oil Prices Fall

On the currency markets, the value of the dollar against a basket of currencies has increased. The dollar index, which shows the value of the U.S. dollar against the other six major world currencies, is around 104.37 points, while it was 103.74 points at the same time yesterday.

At the same time, the exchange rate of the dollar against the Japanese currency rose from yesterday’s 135.70 to 137.30 yen. The U.S. currency also strengthened against the euro, with the price of the euro slipping to 1.0640 dollars, down from 1.0665 dollars at the same time yesterday.

Oil prices, on the other hand, have fallen as traders fear that demand for ‘black gold’ will weaken with the slowdown in economic growth. The price of a barrel on the London market slipped 0.36 percent to 80.90 dollars, while on the U.S. market, a barrel decreased by 0.43 percent to 75.80 dollars.