Inflation and fears of a recession, contribute to falling financial markets

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The sell-off in stock markets keeps getting worse as investors grow fearful about inflation, and whether the Federal Reserve can cool prices without sparking a recession.

Transcript

STEVE INSKEEP, HOST:

Wow. The S&P 500 is on the verge of a bear market. That's when the index drops at least 20% from its recent high. The big driver of falling stocks is inflation and now fears of a recession. We spoke earlier with NPR's David Gura.

DAVID GURA, BYLINE: The latest read of the consumer price index showed inflation slowing down a tad. But the bottom line is prices are still rising faster than we've seen in decades. And what Wall Street wanted was to see a stronger sign inflation had peaked. The problem is these prices are not slowing down fast enough, which, of course, you know if you've shopped for groceries recently, bought an airline ticket. And that's fueling fears the Federal Reserve will have to hike interest rates more aggressively.

Now, this is scary because, one, borrowing costs are going to rise. Mortgage rates are already higher. And two, there's a real risk this could send the economy into a deep downturn. On Thursday, the Senate confirmed Jerome Powell to a second term as Fed chair. And he starts that term, Steve, at a time when investors are really unsure the Fed will be able to raise rates without sparking a recession.

INSKEEP: Does that explain why the numbers are down on the markets?

GURA: Yeah. Even market veterans have been taken aback by the volatility. We've seen the Dow gain more than a thousand points one day and lose more than a thousand points the next. And then there's fear. You can see it in a volatility index called the VIX, also known as the fear index. It's now almost double what it was at the beginning of the year. Now, what we're waiting for is to see if the medicine that the Fed has started to administer is working. It's done two rate hikes, and the Fed signaled it's likely to do two more of half a percentage point each at its next two meetings. We're not going to know if it's working right away. We're in this period when Wall Street also has to wait to see if the Fed is going to do anything unexpected. Its next meeting is not until June 14, which feels like an eternity here.

Eric Freedman is the chief investment officer of U.S. Bank's asset management group.

ERIC FREEDMAN: We have a month-plus of what's called a paucity of conversations - definitive conversations and decisions from Fed - but perhaps more chatter.

GURA: Freedman says markets will react to that chatter, to speeches from Fed officials and to each new piece of economic data. So, Steve, that volatility is not going to go away anytime soon.

INSKEEP: Can you put market declines in context here? How bad is it?

GURA: Well, we've gone from some pretty incredible gains to these new lows. Remember, the S&P 500 hit a record high in January. So this is a pretty big drop. What also makes this downturn different is the Fed has not aggressively raised interest rates like this in years, and both stocks and bonds are selling off simultaneously. That is usually not what happens. U.S. Treasuries are seen as safe havens. And investors turn to them in times of turmoil. Eric Freedman says, we haven't seen this happen in a calendar year in at least 46 years. I'll add that crypto is also getting crushed - Bitcoin down about 35% since the start of the year.

INSKEEP: Let's talk about another source of volatility here - Elon Musk, who is planning to buy Twitter or says he is but now says the deal is on hold. What's going on?

GURA: Well, this morning he tweeted that the deal is on pause because he wants to make sure spam and fake accounts make up less than 5% of Twitter's users. That's what Twitter claims. And the reason this matters is fake accounts are not going to bring in advertising dollars. And that is Twitter's primary source of revenue. This could also be a way for Musk to get out of the deal or at least think twice about it.

He's pledged a significant amount of his personal fortune to be able to make the deal. And Twitter's a company that has struggled to make a profit. Of course, Elon Musk is known to be unpredictable and prone to changing his mind about things, Steve. In a subsequent statement - a subsequent tweet - he says he is still committed to the acquisition.

INSKEEP: I know that NPR's David Gura will be telling us about the next twist and turn. David, thanks so much.

GURA: You got it.

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