They are just possibilities, but worries about them are weighing on the markets.
Stock and bond markets in disarray
Yields on long-term bonds have fluctuated, suggesting the markets have little conviction about where the economy is headed.
If the Fed does raise rates, it wonâ€™t take much for short-term interest rates to exceed the level of long-term ones â€” which would be another bad omen for the economy. Such a juxtaposition of interest rates, known as a yield curve inversion, has often preceded recessions.
The broad stock market has gotten off to one of its worst starts since 1900, Bloomberg records show. The markets are swinging up and down. But already this year, the S&P 500 has been down more than 10 percent from its peak, a drop known on Wall Street as a correction, while the Nasdaq composite has been more than 20 percent below its November peak, putting it into what Wall Street calls bear market territory.
Commodity bets have paid off. The iShares S&P GSCI Commodity-Index Trust, an exchange-traded fund that tracks a diversified group of commodities, is up 51 percent this year. Energy stocks have soared, but little else has done well.
For long-term investors with balanced, diversified portfolios containing stocks and bonds, declines like this occur periodically. They can be painful, but if history echoes itself, the stock market will recover and surpass its past highs.
If the effective closing of Russian financial markets and rising commodity prices lead to a steeper stock market decline, or have other, unexpected consequences, the Fed will be in a tough place. It is moving toward tightening monetary conditions but might have to reverse itself and engage in another rescue operation, as it did in March 2020.
This is a risky moment, as Liz Ann Sonders and Kevin Gordon of Charles Schwab said in a note on Monday. Itâ€™s conceivable that the war could end abruptly, and energy prices could sharply decline, but â€œbetting on that in the near term seems a foolâ€™s errand.â€