Wall Street has spent the past few years rewarding investors with impressive gains. Lately, though, some signs suggest the ride may not stay as smooth as it has been. After Kevin Warsh’s first meeting as Federal Reserve chair, expectations for near-term interest rate cuts have cooled.
Rather than easing policy, the Fed appears focused on bringing inflation back toward its 2% target. Since inflation remains above 4%, the possibility of rate hikes later this year is now back on the table.
What could change
Why do potential rate hikes matter? Higher interest rates generally make borrowing more expensive. As a result, consumers may spend less, businesses could scale back investments, and economic growth might slow.
Back in 2022, investors saw how powerful rate hikes can be. During that period, the S&P 500 fell more than 19% as the Fed aggressively raised rates to combat inflation. This time, however, the situation looks different. Current rates are already far above the near-zero levels that existed before that tightening cycle began. Because of that, many analysts believe any future increases would likely be more measured.
Meanwhile, another question is worth asking: has the market simply run too far, too fast? Since 2023, the S&P 500 has climbed roughly 93%, far above its long-term average return. Much of that growth has also been driven by large technology companies, which leaves some investors wondering how long the momentum can continue.
Preparing for volatility
None of these factors guarantees a major market decline. Though after several years of strong gains, a correction or period of slower growth would not be unusual.
For long-term investors, staying invested through market ups and downs may still make sense. On the other hand, those approaching retirement might prefer safer options such as dividend-focused funds or bonds to help reduce risk if market conditions become more challenging.
