Because the stock market keeps crashing

On Monday, the Standard & Poor’s 500 list, one of the most important on the US stock exchange, which hosts the 500 largest listed companies in the United States, fell 3.9 percent in one day, entering the so-called “bear market”. : It is a condition that occurs when the market is down more than 20% from its recent peak, and it is considered worrying because it may indicate that the market pullback is not only a temporary correction, but can remain stable for a long period, for months or longer.

On Monday, with Standard & Poor’s crashing, the list fell 22 percent from its January peak, taking with it all of the major US listings. In the following hours, Asian stock markets also collapsed.

Stock exchanges, American and not only, have experienced a sharp decline for months for various reasons ranging from inflation to the crisis in the technology sector to the repercussions of the war in Ukraine. Specifically, however, Monday’s dip in the S&P is due to two main factors: the fact that rising inflation hasn’t slowed down as hoped. As a result, the Federal Reserve (the US central bank) is preparing to raise interest rates again, in what is likely to be the highest in three decades.

Stock exchanges reacted fully on Monday to a series of inflation data released at the end of last week, Friday. In recent months, the Federal Reserve raised interest rates twice in an attempt to contain inflation, and there was a widespread belief in American economic circles that this measure was sufficient: that the rate hikes that had already taken place would have started to get in the way of inflation, that the peak of the rate increase It had passed, so the economy could have started to focus on growth again.

New data on the US economy released on Friday instead showed that inflation not only continues to rise, but has accelerated: in May, the price increase was 8.6 percent, with a monthly increase of 1 percent compared to 0.3 percent in April. . The Fed, which until a few days earlier gave signs of optimism, hinted that at this point it will raise interest rates further.

Fed members will meet on Wednesday and are expected to decide on a 0.75 percent rate hike, the highest single rate increase since 1994. Rates are also likely to rise again in the coming months, arriving in September. Almost 3 percent: Not at any time since the 2008 financial crisis.

The interest rates we are talking about are the ones at which central banks lend money to other banks, which is basically the cost of money. Historically, raising interest rates is the best tool available to central banks to control inflation, because increasing the cost of money reduces the phenomena that causes prices to rise.

However, the side effect of raising interest rates is that there is a risk of a general slowdown in the entire economy: if rates are raised too much, there is a risk of a recession. But for central banks, it is impossible to know when to stop in time, because the effects on inflation appear after a long period, often months.

That’s why stock markets fell on Monday: Investors fear that the US economy, already hard hit by inflation, may be inadvertently pushed into a recession due to an interest rate hike by the Federal Reserve. “I’m afraid the Fed will raise rates too much and send us into a severe recession,” he said. The New York Times Head of an investment agency.

In Europe, things are going a similar way: Last week, for the first time in more than ten years, the European Central Bank announced an interest rate hike, indicating that there will be more and strong increases in the coming months. On Monday, all European stock exchanges closed with strong declines, although they were not as severe as those seen in the S&P Index.

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