All of this comes at a bad time for companies, which are facing falling profit margins, even as share prices are below multi-year highs, and could fall further after the S&P index has doubled from its low of. pandemic. Even with nominal Treasury bond yields hitting their highest level in over a decade, inflation-adjusted interest rates have room for further hike.
Jerome Powell and his colleagues at the Federal Reserve will not be alarmed by the sharp drop in asset prices, after spending the past six months tentatively and then openly saying that inflation can only subside as jumps in financial markets slow. Yields on 10-year bonds rose more than 1.5%, stocks fell 20%, and non-investment grade bonds widened margins by nearly 90 basis points, with the potential for further bad debts.
“The Fed’s message is to keep going until something goes wrong,” says George Birx, global economic strategist at Bespoke Investment Group. “If this is the direction of the Fed, how should the markets go down?” He asks.