Inflation fears sink stock market, buoy interest rates
Inflation fears sink stock market, buoy interest rates
WASHINGTON (AFP): The stock market slide reflects increasing fears of inflation undaunted by the Federal Reserve's tighter monetary policy and a lack of evidence of an overheating economy.
On the bond market, the most sensitive barometer of inflation worries, the fall in prices has accelerated during the past week, pushing up interest rates, which move in an inverse direction.
The Treasury's bellwether 30-year bond climbed to 7.06 percent by late Tuesday, its highest level since February 1993. Around midday Wednesday it had reached 7.08 percent in a market described by an Indosuez Bank trader in New York as "very nervous."
The surge in long-term rates triggered a selloff on the New York Stock Exchange, wiping out seven percent of the Dow Jones industrial average since Jan. 31. Of that, 3.22 percent was lost since last Thursday.
Tuesday the Dow plunged 63.33 points (1.68 percent), falling below 3,700 points for the first time since December 1.
The dive continued Wednesday. At midday the Dow was down more than 21 points at 3,678.
The rout is widespread. Tuesday the NASDAQ Composite Index tumbled 2.2 percent to 755.29 and the Standard and Poor's 500- stock index dropped 1.6 percent to 452.48. And the slumps continued Wednesday.
"The U.S. market problem is interest rates, interest rates, interest rates," said Arthur Micheletti, marketing strategist for the California investment firm Bailard, Biehl and Kaiser.
If the Federal Reserve continues to raise rates, he said, the stock market could lose an additional five percent to 10 percent in the next three months.
Recession
With a too-bold Fed move, he warned, "We could be back in a recession by the fourth quarter."
The Fed launched an anti-inflation move on Feb. 4, engineering a quarter point increase in the federal funds rate to 3.25 percent.
Despite Fed Chairman Alan Greenspan's assurances that the surprise action, the first in five years, was taken as a preemptive strike against possible inflationary pressures during the economic recovery, investors reacted with alarm.
The Dow lost 96 points that day, unleashing inflation fears that continue to stalk the markets.
The Fed bumped up the federal funds rate, the interest on overnight interbank loans, another quarter point to 3.50 percent on March 22.
But the bond market had anticipated the move and the 30-year rate fell, momentarily soothing inflation worries.
John Lonski, principal economist at the ratings firm Moody's, said the Fed's strategy of keeping long-term interest rates as their lowest level while avoiding economic overheating should not cramp activity before the 1995 second quarter.
Slow
He predicted that economic growth would slow from 3.7 percent this year to 2.5 percent in 1995.
Lonski explained that the Fed must reign in activity now to avoid runaway inflation later, citing declining unemployment and February data which showed that U.S. industries are operating at 83 percent capacity.
"Monetary policy is not an exact science," he stressed. "We can never know for sure if Fed action will slow down the economy enough to fight inflation without hurting the economy."
And that is what the Clinton administration worries about. To ease investor concerns, the White House has emphasized there are no signs of inflation, pointing out it remains well-behaved at about three percent, compared to 2.8 percent in 1993.
And Budget Director Leon Panetta recently predicted that long- term interest rates, key to economic growth, will begin to come down when it becomes clear there is no risk of recession.