ST PAUL, Minn. — There's no way to sugarcoat Friday's stock market activity.
The Dow Jones Industrial Average experienced its most significant one-day loss since October 2020, while the S&P 500 and Nasdaq Composite fell by 2.8% and 2.6%, respectively.
So, what exactly happened, and what's going to happen next?
To help explain, KARE 11 turned to Dr. Tyler Schipper, an associate professor of economics at the University of St. Thomas. Here's a transcript of that interview, editing lightly for clarity.
Q: What do you make of today's news with the stock market situation?
SCHIPPER: The stock market is down almost 3% today, so it's a big off-day. But, it seems like there's a lot of different things going on. Some of it's individual companies having bad earnings reports, but a lot of it is also the macroeconomics. What's the Fed going to do and when are they going to do it?
Q: Could you explain for those who are unfamiliar, what the Fed is looking to do with half-point rate increases?
SCHIPPER: Traditionally, when the Fed starts to do what we call tightening monetary policy, they're trying to gradually raise interest rates so that people spend a little bit less, and corporations spend a little bit less. Generally, just slow the economy down just a little bit. And typically, that's done in these .25% or 25 basis point increments — so very slowly — to try and evaluate how effective is monetary policy in trying to bring down something like inflation. The news was that Jerome Powell, Chair of the Federal Reserve, went out and said, 'we're really looking at a half-point interest rate change now.' So, that seems like a little bit of an anomaly. Usually, it's these very incremental changes, so that bigger jump then is causing some reaction in stock markets.
Q: What does this mean — is it just a short-term hiccup? Should people be concerned or just stay calm?
SCHIPPER: I think staying calm is the way to go. Anything with the stock market, remember, the stock market is a long-term game. For most people, you have your money in a 401K, 403B, whatever that financial instrument is, and you leave it in there for years and years and years, and that's where you get the long-run gains of the stock market. So, if you're worried about your retirement today, and retirement is 30 years away, this isn't going to be a big deal for you. The bigger deal for the economy is going to be, how well the Federal Reserve executes its monetary policy. And that's the fear. It is kind of this knife-edge, right? How much do we want to control inflation, versus how much do we want to tap the brakes on the economy? And that's hard. I'm glad I don't have that job of trying to make those decisions with everyone watching me and Congress being mad and having to testify every day to Congress, but that's what they're trying to do. People are upset about inflation, but they'd also be more upset if we tipped into a recession into monetary policy.
Q: Can you explain for our viewers, why must the Fed raise interest rates to soften inflation?
SCHIPPER: So, the Fed's reasoning is that inflation is hard on individuals, right? If prices are going up faster than your wages, you're able to buy less stuff. If you're a retiree who has a fixed income, it means that you don't have a job that you can go make more money at to afford those essentials. The Fed has what we call a dual mandate — two jobs it's supposed to do. Keep prices in check, but also help out the economy and promote economic growth. And sometimes those two policies are at odds with each other, so it's trying to balance those two things. So, we want the Fed to succeed. The Fed is helpful in trying to manage the economy. It's typically very effective at what it does but what it does is extremely hard to do.
Q: Do you have any thoughts on predictions about a coming recession? Should people be prepared for something like that in the future?
SCHIPPER: A lot of this talk has happened because of an inversion of the yield curve. Without getting too technical, the inversion of the yield curve is sometimes a predictor of a future recession. The problem with that prediction is that it's not predictive of when the future recession happens, whether it's six months from now or two or three years from now. We always know there's that next recession. The fact there's been some slight inversions of the yield curve, it shouldn't be that surprising that down the road there could be a recession coming up. Right now, the betting on there being a recession in the short-term, it's a bet that the Fed messes up. The rest of the macroeconomic data in terms of GDP growth, in terms of job growth, all look strong. That gives the Fed some wiggle room to be aggressive about inflation, so hopefully, that gives them enough wiggle room that it's not imminent that they mess up and put us into a recession.
Q: So, bottom line, today's news with the stock market is something to pay attention to, but keep it in perspective?
SCHIPPER: Yeah, and thankfully, people are listening to Jerome Powell more than other Fed presidents. Because James Bullard, President of the St. Louis Federal Reserve, actually kind of floated this idea that we could have a .75% interest rate change. And I did one of these interviews maybe a couple of weeks ago, and I said, you know, if inflation data keeps coming out bad, it's out there — not seeing it talked about yet — but .75% could happen. And then James Bullard gets on the horn and says hey, prepare yourself for .75 percent!
If markets had been reacting to Jerome Powell saying that, that would have been much different than just one of the Federal Reserve presidents, but the Fed has taken this, what we call a hawkish turn where they're more concerned about inflation than job growth right now. The data coming out at the end of the month is going to be really important. Two big things come out before the Fed makes its decision. At the very end of the month, there is another measure of inflation, which is actually the Fed's preferred measure, and that will come out as well as the first estimate for the first quarter of GDP... If GDP is really, really strong and that inflation number continues to look like it's going up, then maybe we start leaning more towards James Bullard and the Fed is even more aggressive.
The Fed's decision isn't going to happen until early May, so we have about a week before this ends up happening. I think by the time Jerome Powell announces it... he's been telegraphing pretty strongly what the Fed's actions are. I don't think unless there's really disastrous news at the end of the month, that they'll deviate from this half-percent. I think he's been trying to formulate consensus ahead of time by announcing this, letting everyone take it in and adjust to it a little bit. Then, when the Fed actually makes a move, it's entirely expected.
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