Stock market tumbles as Fed's hawkish stance drives down investors' sentiments

The BSE Sensex is trading down 400 points or 0.6% to 62,254, giving up yesterday's gain, whereas Nifty-50 shed almost 120 points or 0.6% and trading down at 18,542 as of 12:30 pm

Indian equity market fell amid surging concerns over recessionary pressure and Fed's hawkish outlook. The BSE Sensex is trading down 400 points or 0.6% to 62,254, giving up yesterday's gain, whereas Nifty-50 shed almost 120 points or 0.6% and trading down at 18,542 as of 12:30 pm.

Wall Street also wiped its previous gains to end up in red. The S&P 500 declined 0.6% after two days of gains, while the Dow Jones Industrial Average lost 140 points or 0.4%. The tech-heavy Nasdaq Composite also lost 85 points or 0.76%.

The Fed's decision to hike the federal funds rate to 50 bps after four straight 75-bps hikes was in line with market expectations; however, the speech by Fed's chairperson Jerome Powell signaled that the fight against inflation is far from over. This move brings the federal funds rate to a new range of 4.25% to 4.5%, the highest level since December 2007.

In a press conference, Powell said, "The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases.

Continuing his statement, he also added, "But it will take substantially more evidence to give confidence that inflation is on a sustained downward path."

The message from the Fed is loud and clear that their overarching focus is to bring down inflation at 2% over the long run. Investors need to keep in mind that Fed is unlikely to pause further rate hikes in 2023 but a rate hike in smaller increments is a real possibility.

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The median forecast suggests that the terminal rate (the rate at which Fed is expected to pause further hike) stands at 5.1%, which is 0.5% higher than the September projection of 4.6%.

Deepak Jasani, Head of Retail Research at HDFC Securities, said, "the U.S. economy could slow to a crawl in 2023 and unemployment could jump to as high as 4.6%, as the Federal Reserve tries to clamp down on high inflation, the central bank's latest forecast shows. For the first time, several senior Fed officials also predicted a recession next year."