Why inflation is sparking a lot of turmoil in markets : NPR

It’s been a rough start of the year for Wall Street – and it keeps getting worse.

Concerns about surging inflation are keeping investors on edge, sending stocks sharply lower on Tuesday. The Federal Reserve has projected it will raise interest rates three times this year, which could raise borrowing costs across the economy, including for mortgages and car loans.

But investors fear the Fed will need to be even more aggressive given how stubborn inflation has been. Consumer prices surged 7% in December, the biggest annual increase since 1982.

Many analysts now believe the Federal Reserve will start raising interest rates in March and that the central bank may need to raise them four times this year.

As a result, bond markets have sold off and stocks have tumbled since the start of the year, with the Nasdaq down nearly 7% so far in 2022 as of early afternoon on Tuesday.

Here are three things to know about the turmoil in markets.

What’s behind the falls?

The sell-off in stocks is being led by the bond markets, which have tumbled this year given that inflation can erode how much money investors make on their trades.

When bond prices fall, their yields rise. That can have an impact on all of us because bond rates help determine all kinds of interest we pay on on things like credit cards, or for car and home loans. The average rate on a 30-year fixed-rate mortgage hit its highest since March 2020.

That sell-off in bonds, with yields now at two-year highs, has spooked stock investors as well. Investors are bracing for an aggressive response by the Fed to fight inflation, but there’s still a lot of uncertainty about what the central bank will do – and what the consequences will be.

Federal Reserve Chairman Jerome Powell initially suggested inflation would…