Stocks Drop As Worry Over Fed Snuffs Out Optimism: Markets Wrap

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(Bloomberg) -- US stocks are on track for their worst monthly rout since April, as markets were repeatedly pummeled by the Federal Reserve's resolve to keep raising interest rates until inflation eases.

The S&P 500 fell, after a bruising session on Thursday that took the index to its lowest level in almost two years. Traders were briefly heartened on Friday after Fed Vice Chair Lael Brainard acknowledged the need to monitor the impact rising borrowing costs could have on global-market stability. But stocks pared gains of nearly 1% as investors contended with continued strength in personal consumption expenditure, one of the Fed's preferred inflation gauges.

Risk assets have been in a tailspin since the central bank delivered a third jumbo hike last week and warned of more pain in the horizon. Friday's comments by Fed officials came with some nuance. While Richmond Fed's Thomas Barkin said key pressures stoking price growth are showing some signs of easing, San Francisco's Fed Mary Daly said incoming data will determine how much the Fed will raise interest rates by.

Still, warnings of rate-hike pain continued to flash, rocking investors' faith in central banks including and beyond the Fed. JPMorgan's Marko Kolanovic, in a new note, said he's “increasingly worried about central banks making a policy error.” Bank of America Corp. strategists also cautioned that the Fed's trajectory could push credit markets toward dysfunction.

“Investors shouldn't ask if the Fed will pivot, but rather how deep into the recession we'll find ourselves before they finally act,” said Sean Sun, portfolio manager at Thornburg Investment Management. “The Fed is clear that fighting inflation is job number 1, and in the face of that effort, the economy will be acceptable collateral damage.”

The S&P 500 is headed for its third straight quarter of losses for the first time since 2009, and the Nasdaq 100 for the first time in 20 years.

“By no means do I think we get a soft landing, but too much Fed-based negativity is priced in, and the data could start tilting toward lower inflation than the market -- and Fed -- have been fixated on,” wrote Peter Tchir, head of macro strategy at Academy Securities. “I continue to believe the ultimate lows will be in a true “risk-off” scenario, where bonds rally while stocks fall. But I think for now, both can limp into month-end and get some strength.”

Fears of global recession are still mounting as the threat of higher rates saps growth. The case of the UK shows how faultlines between government and central bank policy on tackling inflation can erupt into a crisis. Hopes evaporated that the British government would succumb to pressure to back down from tax cuts that brought the pound to the edge of dollar parity.

Traders are now gauging the next pressure points that will further erode gains won by the Bank of England's billions in bond-market buying in the past two days.

Read more: UK Treasury Hasn't Sought to Speed Up Budget Watchdog's Forecast

Geopolitical tensions also continued to simmer as Vladimir Putin vowed his annexation of four occupied regions in Ukraine is irreversible.