Markets plunge amid fears of sharply higher interest rates

Wall Street has gone into meltdown mode over inflation fears and the possibility that higher interest rates are imminent. The Dow Jones Industrial Average, NASDAQ and the S&P 500 all fell significantly. It is now officially a bear market, down more than 20 percent from its January high. Julia Coronado, MacroPolicy Perspectives president and former Fed economist, joins Judy Woodruff to discuss.

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  • Judy Woodruff:

    Wall Street has gone into meltdown mode tonight over fears of inflation and the possibility that higher interest rates are imminent.

    The Dow Jones industrial average lost 876 points today to close at 30516, nearly 3 percent. The Nasdaq fell 4.7 percent. And the S&P 500 dropped nearly 4 percent. It is now officially in a bear market. That's down more than 20 percent from its high in January.

    The sell-off has been broad. All three major indexes have finished lower nearly every week since mid-March. And cryptocurrencies have lost nearly $2 trillion of their value since November.

    Some insights and perspective on all of this now from economist Julia Coronado. She's the founder of her own firm for economic analysis and a former economist for the Fed.

    Julia Coronado, welcome back to the "NewsHour."

    So, tell us, what are the forces driving this plunge?

    Julia Coronado, University of Texas at Austin: The catalyst really came on Friday. We got higher-than-expected inflation ratings again.

    And one of the major gauges that the Fed watches of consumers' inflation expectations rose to the highest level since 2008. So, the combination of those two things really led the markets to start speculating that the Fed would raise rates much faster than it has already signaled. And that has in turn hurt risky assets like stocks.

  • Judy Woodruff:

    So, I think some people look at this and they know, OK, the Fed is going to have to raise rates, to an extent, to put the brakes on this inflation.

    People know that is going to happen. And so how do they — how are they watching this and then worrying about it at the same time?

  • Julia Coronado:

    Well, we're really in uncharted territory in terms of, what are the drivers of inflation, how high will it go, how long will it last?

    And, therefore, that translates into uncertainty about how high the Fed will have to raise interest rates, how much they will need to take the punchbowl away.

    So, this was an incremental data point that told us they're going to have to go further, faster. And that's going to hurt all kinds of sectors. It's already hurting housing. Mortgage rates are poised to go above 6 percent, the highest in a very long time. And that's already starting to dampen enthusiasm for — in home sales, and probably will eventually hurt valuations to some extent.

    So that's the leading edge. And, obviously, stocks are also feeling the pinch too.

  • Judy Woodruff:

    And so if the Fed were to raise rates in the next few days, say, three-quarters of a point, rather than half-a-point, which had been expected, how much of a difference could that make in these markets?

  • Julia Coronado:

    It's a great question, because it's not just about — as you say, we all know that the Fed is raising rates. We all know the direction of travel here.

    And it's not even really about whether they go 50 basis points or 75 basis points on Wednesday. It's really, what does that signal for the whole path? Does that tell us that, instead of — that we might see them raise rates much higher than we previously thought?

    And I think that's the line of thinking here, is that not only are they going to raise rates 75 basis points on Wednesday, after signaling they were going to go 50. That might be followed by another 75-basis-point hike in July, and maybe even in September. So we're going to end up with rates higher than we saw last — during the last expansion.

    And we really don't know where that stopping point is yet.

  • Judy Woodruff:

    Julia Coronado, I have to ask you, how much of this is counterintuitive?

    Because we look at other economic indicators. The economy is still growing. Unemployment is at — still at a very low level. Consumers are still spending.

  • Julia Coronado:

    Yes.

  • Judy Woodruff:

    So, square the circle or however you want to describe what you're doing to explain it for us.

  • Julia Coronado:

    Yes, you're highlighting the tensions we see in the data.

    In some ways, this economy is extremely strong. We have got a very strong labor market, low unemployment. Workers have been coming back to the labor market. We have been generating really an unprecedented number of jobs every month consistently for more than a year now.

    So, in some ways, it's very strong. And, in some senses, that leads the Fed to have greater confidence that they can and should raise interest rates higher to cool off the economy and bring it into better balance. The strength and the resilience of the job market and the consumers has kept inflation higher than it would otherwise be.

    And so we do need to bring that, cool that dynamic down a little bit in order to bring inflation down.

  • Judy Woodruff:

    And just finally, the dreaded R-word.

    Who and what determines whether we do end up in a recession?

  • Julia Coronado:

    You know, every recession is different.

    The one thing that is the same with every recession is that it comes usually with job losses and rising unemployment. We're a long way from that. So, we're still starting from a low point on interest rates and a very strong job market. We have got a long distance to travel before we really are looking at an imminent recession.

    So, if — can the Fed get this balance right? Can they nail that what we call soft landing, where inflation comes down without unemployment rising significantly? I think there's still some hope for that. It's just that landing strip for the Fed has gotten narrower and narrower with each of these inflation trends.

  • Judy Woodruff:

    All right, that helps us think about what they're facing, even if we're still full of questions.

    Julia Coronado, thanks so much.

  • Julia Coronado:

    My pleasure.

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