Wall Street’s response to higher-than-expected inflation numbers increased bets that the Federal Reserve still has ways to go in its aggressive tightening campaign, decreasing the likelihood of a soft landing. The S&P 500 lost ground on Friday, extending its worst weekly slump since 2023. After the Treasury two-year yield rose to 4.8%, the highest level since 2007, the tech-heavy Nasdaq 100 fell by roughly 2%. At the Fed’s upcoming three meetings, swaps are currently pricing in 25 basis-point increases, and by July, bets on the peak rate had risen to nearly 5.4%.

Despite a protracted stretch of moderate equities fluctuations, volatility increased this week. That’s a reflection of a market that has become more costly following an enthusiastic comeback from its October lows, aside from all the economic worries. In light of worries that a future recession could worsen the outlook for Corporate America, those advantages have been diminishing day by day.

The sudden increase in the personal consumption expenditures gauge highlighted the dangers of long-term high inflation. Furthermore, the Fed may find it more difficult to achieve its target of 2% inflation due to resilient expenditure and the exceptionally strong labor market. Separate data revealed that new house sales exceeded expectations as US consumer sentiment reached its best level in a year.

The central bank’s initial slow approach to growing prices has been criticized, which suggests that officials may need to boost rates as high as 6.5% to combat inflation. Five economists and academics make the case in a paper that policymakers have an unduly optimistic perspective and will need to cause some economic pain to bring prices under control.

Investors have been selling both stocks and cash in favor of bonds as they prepare for the possibility that the Fed would continue its hawkish policy actions, according to analysts at Bank of America Corp.

Companies are cutting back on dividend payouts to shareholders in an effort to strengthen their balance sheets in the face of dwindling earnings and high debt loads. According to data provided by Bloomberg, as many as 17 businesses in the Dow Jones US Total Stock Market Index have decreased their payouts so far this year. Executives don’t, however, take this decision lightly because it has the potential to deter investors and lower share prices.

Money managers are strengthening portfolios and mitigating the possibility of a protracted battle against inflation in the interim by keeping to credit with maturities of just a few years. To lessen the effects if central banks keep raising interest rates to combat inflation, some funds are actively reducing what is known as duration, a measure of sensitivity to interest rates. Others are just paying attention to short-term notes since the additional yield they receive from longer-term instruments is insufficient to balance the risk of a downturn when interest rates rise.