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Uncertainty in the financial markets centers on inflation

STEVE INSKEEP, HOST:

You know, yesterday, I glanced at the stock market news and instantly saw that it was one of those days when it's better not to look. The Dow Jones Industrial Average was down about 1,000 points, and now I wake up to find the market gained it all back. What happened while I wasn't looking? NPR's David Gura keeps an unflinching eye on the markets and joins us now. David, good morning.

DAVID GURA, BYLINE: Unflinching. Good morning, Steve.

INSKEEP: I do not understand what rationally could have changed about the economy between noon and 4 p.m. I assume something happened in the trading there that we don't really grasp at this moment. But let's start with the facts we do know. How did yesterday unfold?

GURA: Just an incredibly volatile moment on Wall Street. Monday was just remarkable. The kind of swing that we saw shows how much uncertainty there is on Wall Street right now, Steve, most of which centers on inflation, which has been with us for a while. But investors are waking up to two new realities. The first is inflation is higher than it's been in four decades. Second thing, and perhaps most importantly, is the Federal Reserve plans to fight it more aggressively. And what that means is the Fed is going to raise interest rates, but it has to achieve a very tricky balance here. The central bank needs to raise rates just enough to control inflation without bringing the whole economy to a halt. And, Steve, the Fed starts a two-day meeting today, and Wall Street is waiting anxiously for an update.

INSKEEP: Well, the Fed has been trying in recent years to remove almost all suspense from its actions and signal where it's going. So what is suspenseful now?

GURA: Yeah. I mean, the prospect of higher rates is pretty unsettling for markets. The Fed has had interest rates near zero for many years now. And as it moves away from that, Wall Street's nervous because low interest rates have been really good for stocks. They've been on a tear even during the pandemic, and many Americans had extra cash. They weren't traveling. They weren't going out. They - the stimulus payments, as well. So they put some of that money into the market. And they weren't just trading stocks. First-time investors bought bitcoin, which surged along with other cryptocurrencies. There was this signal moment when an NFT, a digital work of art by the artist Beeple, sold at Christie's for $69.3 million dollars. Higher inflation has changed the landscape, however, and the drops that we've seen in recent days, I think, could portend more market misery.

INSKEEP: Do some of the analysts you talk with fear that something is going seriously, truly, grandly wrong?

GURA: Yeah, some do. There are really two schools of thought on this. One camp believes we're seeing bubbles burst like we did in the early 2000s. And when there is a bubble, people make risky, speculative bets and things get too expensive. 2008 financial crisis was sparked in part by a boom in housing that led to all kinds of risky investments in subprime mortgages.

Now legendary fund manager Jeremy Grantham says this is the late stage of a bubble. And he writes in a new note, it will very probably end badly. But there are others who disagree. Amanda Agati is one of them. She's the chief investment officer at PNC Financial Services, and she says what we've been seeing lately is noise.

AMANDA AGATI: So it's definitely a little bit uncomfortable here, but it's definitely a part of a natural, healthy, functioning market environment.

GURA: You know, corrections or market resets happen. They can be painful, and there has been pain, for sure. Bitcoin, for example, is now trading at about half of what it was going for at its peak. And that peak, Steve, was just a few months ago in November.

INSKEEP: Wow. David, got to be honest, I still think, as you're watching the market, that the best reaction is what I had yesterday - just look away, wait a little while, let things smooth out over time. But suppose people are watching for what happens next. What should they watch for?

GURA: Yeah. Wall Street is paying very close attention to every whisper, really, from Fed Reserve Chairman Jerome Powell and his fellow policymakers. Powell scheduled to speak with reporters on Wednesday when that two-day meeting wraps up. You know, consensus is the Federal Reserve will raise rates four times this year starting in March. But the central bank has said all along it'll respond to changing economic conditions. So at this point, it's really anyone's guess. And Wall Street doesn't like that kind of uncertainty, Steve, which means we could see some more of the turbulence that we saw on Monday.

INSKEEP: NPR's David Gura. Thanks so much.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.