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Pessimism on Wall Street as Federal Reserve hikes interest rates

SCOTT SIMON, HOST:

The U.S. stock market started strong this year, but it has been pretty much downhill ever since. Yesterday, the Dow Jones Industrial Average flirted with a bear market as a sell-off in stocks deepened. NPR's David Gura joins us.

David, thanks so much for being with us.

DAVID GURA, BYLINE: Thank you.

SIMON: How does Wall Street see this downturn? What might it mean for the future?

GURA: Well, you know, big investment banks pay big money to analysts and strategists to figure out where markets and the economy are heading. And right now they are much less confident. David Kostin is the chief U.S. equity strategist at Goldman Sachs. And Wall Street took notice on Friday when he revised his forecasts and said his outlook for stocks and the economy is unusually murky. Take inflation, for instance. A lot of investors thought the Federal Reserve was getting it under control. And then the consumer price index for August told a different story. There were signs inflation became more entrenched, including increases in rent. And now as companies are reporting quarterly results, Kostin points out many of them, including FedEx and Ford, are revising their outlooks downward because the landscape has changed.

DAVID KOSTIN: It's not so clear exactly where we are in that landscape. And that's, I think, the challenge that portfolio managers and investors in the, you know, environment and community writ large are facing right now.

GURA: So, Scott, we're seeing a lot of revisions and a lot of recalibration happening.

SIMON: David, why was there this big sell-off?

GURA: Well, trading was volatile going into a big meeting this week of the Federal Reserve. And while the Fed's decision on Wednesday to hike interest rates by an additional three-quarters of a percentage point was not a huge shock, what did surprise investors were the central bank's forecasts - basically battle plans for the Fed's ongoing fight against high inflation. And what the central bank said was, we're going to keep raising interest rates aggressively until we get inflation under control.

Now, those moves are going to be painful to the economy. Growth is going to slow. People are going to lose their jobs because of the central bank's policies - 'cause when you pay higher interest rates to borrow, that puts pressure on companies to invest less in their businesses, and it leads to job cuts. So people are really worried that the Fed's actions, that this very fast pace of raising rates is going to trigger a recession.

SIMON: And how likely is a recession, at least according to the analysts and strategists with whom you've been speaking?

GURA: What's interesting is when I talked to David Kostin, he said his colleagues who were economists at Goldman Sachs still argue there is a way for the Federal Reserve to get this right, to avoid a recession. Now, separate from them, Kostin is thinking about what a recession might look like. The sell-off that we're seeing not just in stocks, but in bonds and other assets, reflects growing pessimism about the future of the economy. Still, despite all that, Kostin retains some optimism the U.S. economy is going to pull through.

KOSTIN: I think, relative to the rest of the world, the U.S. is actually in a comparably pretty good position.

GURA: The outlook looks worse in Europe, which is facing a huge energy shortfall as it weans itself off Russian oil and gas. Asia is still dealing with the fallout from strict COVID lockdowns. And this week, Japan stepped in to prop up its currency, which has been very weak lately. For all the criticism that the Federal Reserve did not take inflation as seriously as it should have early on, it has moved fairly fast and more aggressively compared to central banks in other countries around the world. And all of them are now locked in a battle against inflation, Scott, which has become the biggest economic problem worldwide.

SIMON: NPR's David Gura. Thanks so much.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
Scott Simon is one of America's most admired writers and broadcasters. He is the host of Weekend Edition Saturday and is one of the hosts of NPR's morning news podcast Up First. He has reported from all fifty states, five continents, and ten wars, from El Salvador to Sarajevo to Afghanistan and Iraq. His books have chronicled character and characters, in war and peace, sports and art, tragedy and comedy.
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