Markets went on such a roller-coaster ride this week that it even stumped the most veteran investors. The Federal Reserve plans to start raising interest rates to tackle inflation.

Transcript

SCOTT SIMON, HOST:

It was a week that shook Wall Street - wild swings, an era of near-zero interest rates and easy money coming to an end. And that has investors deeply worried. For a review of what's happened, we're going to turn now to NPR's David Gura and Scott Horsley.

Gentlemen, thanks so much for being with us.

SCOTT HORSLEY, BYLINE: Good morning.

DAVID GURA, BYLINE: Good to be with you.

SIMON: David Gura in New York, let's begin with the stock markets. Why such a volatile week?

GURA: Well, as you said, Scott, a unique period in Wall Street's history coming to an end - for several years now, the Federal Reserve has kept interest rates at these rock-bottom levels because inflation has been so low, and that's made it very inexpensive for companies to borrow money and has fueled Wall Street's record-setting run. That era seems to be over or coming to an end. The Fed held its first meeting of the year and spelled out plans to start raising interest rates as soon as March. And as we all know by now, inflation is at a near 40-year high. And that as many investors scared because, frankly, they don't know if the Fed is up to the task. This is a delicate dance. If the Fed doesn't do enough, inflation is likely to continue. And if the Fed raises interest rates too quickly or too much, that could backfire.

We saw those fears play out on Wall Street this week. The swings that we saw were incredible - starting on Monday, when the Dow dropped by more than a thousand points, only to end the day with a modest gain. The whole week was a roller coaster. The Dow actually ended up rising by about 500 points on Friday to have its best day of the year so far after some companies, at least, reported decent earnings. So even Wall Street veterans who say they haven't seen this kind of sustained volatility since the dot-com bubble burst back in 2000 or during the 2008 financial crisis have been scratching their heads. I can tell you, if you feel confused about what's happening with the economy or on edge about it, you're not alone. Many of the pros are in the same boat, Scott. And there's still this overarching uncertainty. It's not just inflation. The economy right now is facing many risks.

SIMON: Sustained volatility is a phrase I'll continue to use.

Scott Horsley, let's turn from Wall Street to Main Street. What are the economic challenges that we're facing in the economy?

HORSLEY: Well, Scott, the biggest challenge remains the pandemic. Every time caseloads flare up, it makes people nervous about going out, traveling. That cuts into consumption. It also keeps would-be workers on the sidelines, and that just prolongs the staffing shortages and supply chain problems that have dogged the economy.

I talked this week with Lindsay Mescher, who runs the Greenhouse Cafe restaurant in Lebanon, Ohio. Right now she's struggling with not enough customers because of omicron. But even when business picks up, she's worried about rising costs.

LINDSAY MESCHER: Just yesterday, I got a text from my farmer. Our chicken went up a dollar a pound. And I understand that. Her costs have gone up, too. But I can't keep passing these costs on to our customers. I can't charge $12 for a chicken salad sandwich in this town. That's just not going to work.

HORSLEY: And prices are climbing throughout the economy, which is why the Fed's preparing to hike interest rates.

SIMON: David, let me ask. If somebody is concerned about their mutual fund or their retirement fund, what clues should they take from this week?

GURA: Well, Scott, there are some veteran investors who are sounding a warning, saying that we're in a really dangerous time. One of them is the legendary money manager Jeremy Grantham, who is very critical of how the Fed has responded to crises, including the pandemic, with these low interest rates. He says that's led to a superbubble, which is about to pop. And the ramifications of that could be disastrous. But his is not a widely held view. Others say, put what we've been seeing in context. Stocks have rallied for three years. The Nasdaq, for example, has more than doubled over that period of time. And a lot of investors and professional investors see this as a natural recalibration after a period when interest rates have been so low and valuations, the sense of how much companies are worth, has gotten out of whack.

Savita Subramanian is the head of U.S. equity research at Bank of America.

SAVITA SUBRAMANIAN: I was surprised it took so long for the market to do what it's doing right now. So I mean, I think what we're seeing right now is sort of justified based on valuations and what the Fed has been telling us, which is why we were relatively cautious heading into the year.

GURA: I'll let you in on a little secret here, Scott. Markets go up. Markets also go down. Pullbacks are normal - corrections, also normal. That's when we see an index fall from its record high - the Nasdaq now in correction territory. At the end of the day, patience is a virtue. That's what I'm hearing from a lot of investors, professional investors who have been at this for a while. Of course, things can change. What we know reasonably well is that in the near term, the uncertainty is not going to go away, and that's proving hard for professionals, too.

SIMON: Scott Horsley, what effect will this have more or less immediately in the pocketbooks of Americans?

HORSLEY: Borrowing costs are going to be higher. We've already seen mortgage rates rise to their highest level since the start of the pandemic. Car loans and other forms of credit are going to get more expensive as the Fed raises interest rates. Although credit's still going to be pretty cheap by historical standards. Also this year, the federal government is going to be putting less money in people's pockets. A lot of the pandemic relief programs that were in place last year have now ended.

On the positive side, we are seeing rising wages and better benefits. Employers are having to compete for scarce workers, and that's giving employees more bargaining power. On average, wages are still not keeping pace with inflation, though. So a lot is going to depend on how quickly inflation settles down, how soon tangled supply chains get straightened out, how many people who are now on the sidelines come back into the workforce. And, of course, all that is going to depend in large part on what happens with the virus.

SIMON: NPR's Scott Horsley and NPR's David Gura - thanks so much for being with us.

HORSLEY: You're welcome.

GURA: Thank you.

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Tags: stocks  S&P  inflation  Dow Jones Industrial Average  Wall Street  Nasdaq