Federal Reserve signals intent to raise rates soon

Jan. 26—Segments of the stock market have been falling into correction territory, a slide that appeared to reverse somewhat early Wednesday before resuming as the Federal Reserve signaled its intention to raise interest rates, possibly in March.

Before Wednesday, stocks had been weighed down as inflation and and interest rates either rose or appeared poised to rise, market watchers say. The Nasdaq Composite, Dow Jones Industrial Average and S&P 500 all declined at last week's end — the third straight weekly decline for the major American indices — before the markets began something of a comeback early this week.

All the major markets dipped slightly Thursday.

Before Wednesday, some markets had dipped into correction territory — a decline of 10% or more — on an intraday basis as investors came to grips with an expected pullback in economic support from the Federal Reserve, said Jeffrey Haymond, dean of Cedarville University's School of Business Administration.

The big issue, as Haymond views it: The Federal Reserve has held interest rates at zero or close to it since the Great Recession. The Fed has also more than doubled its balance sheets, essentially sinking $5 trillion into the economy in just the past two years, raising its securities portfolio to $9 trillion.

"The markets are starting to come to grips with, 'Hey, there's going to be a different monetary regime,'" Haymond said.

"We've had easy money for over a decade," he added. "And now we have tightening markets."

Uncertainty over whether Russia will invade further into Ukraine is also a factor, he said.

Inflation isn't going to dissipate quickly, he predicted. And unless the market crashes between now and March, the Fed will likely raise rates, he believes. Over the next three to nine months, he expects markets to go lower.

"I don't think they'll really get a handle on inflation," Haymond said of the Fed.

Mark Hackett, Nationwide's chief of investment research, adds to the list of traders' concerns: A disappointing corporate earnings season. Some corporations have reported lower earnings in recent days, often on supply chain woes.

Still, Hackett doesn't see a market panic yet. What's happening is not altogether unhealthy, he said, calling recent activity "a pressure release valve."

"We were just looking for a reason to sell off, and we're getting that reason," Hackett said. "That to me is good news, that probably means this isn't pervasive."

"It's a sell-off in search of a reason," he added. "And I think that's probably the most important thing."

He advises market-watchers to keep an eye on first quarter 2022 corporate earnings estimates, which are starting to tick down, a hint that this may be more than a mere moment of volatility.

PNC Bank Economist Abbey Omodunbi sees the same issues affecting the market, but like others, he also sees reason for long-term optimism.

"The economic fundamentals are solid, though. Regardless of the cross-currents we've been seeing, consumer fundamentals are rock solid," he said.

On Wednesday, Omodunbi expected the upcoming gross domestic product to show strong growth on an annualized basis. In fact, the fourth quarter GDP was put at a 6.9% on an annualized basis, Thursday's report showed.

He doesn't expect the COVID-19 Omicron variant to have a lasting effect on the economy. And a gradually smoothing supply chain this year should help to grow the economy and ease inflation.

"I'm still very optimistic about economic growth," he said.