stocksare vulnerable to further losses until the Fed indicates it’s ready to stop tightening monetary policy, Goldman Sachssaid.
- There are signs of easing inflationary pressures and moderating growth but not enough to prompt a shift by the Fed yet.
A sign from the
Stocks have been bleeding in value as the Fed — led by Chairman
“Using history as a guide, in order for equities to convincingly bottom, this kind of monetary-tightening induced contraction is most likely to end when the Fed itself shifts,” Goldman Sachs strategist Vickie Chang wrote in a note to clients.
The large-cap S&P 500 index dropped on Tuesday, once again moving toward entering a bear market after managing to escape late last week. The tech-rich Nasdaq Composite deepened its position in a bear market as it was veering toward a 3% loss in Tuesday’s action.
The Fed is expected to raise its benchmark rates by another 50 basis points at the June 14-15. The Federal Open Market Committee has increased rates by 75 basis points since March, bringing them to a range between 0.75% and 1%.
“[It] may be that the market needs to see signs of the inflation deceleration that our US economists expect in the second half of the year in order to see sustained relief,” said Chang. Goldman thinks the tightening in financial conditions so far this year is “in the ballpark” of what’s needed for the Fed to reach its policy goals, she said. The Fed is aiming for an inflation average of 2%.
Inflation measured by the Consumer Price Index climbed 8.3% in the year through April, a slight pullback from the 8.5% rate in March that marked a 41-year high. Meanwhile, gross domestic product in the first quarter contracted by 1.4%.
But investors are “unlikely to get a clear signal” from monetary policy makers until there are stronger indications that economic growth is moderating and that inflationary pressures are cooling, Chang said. “There are some signs of each now, but neither is yet definitive.”