The stock market may continue to struggle with the idea that the Federal Reserve may be more inclined to risk a recession as it fights inflation. The Fed said it was raising interest rates by 75 basis points as expected, and issued a new series of forecasts that saw stocks close but closed sharply lower on Wednesday. One basis point is equal to 0.01 of a percentage point. The Fed, in its forecasts, appeared to be a little more rigid than expected on interest rates. The Fed’s average forecast for a peak in the fed funds rate was 4.6% in 2023, up sharply from the earlier 3.8% and 4.51% that were priced in the futures market. That is the point, or so-called “terminal rate,” where the Fed is expected to stop increasing rates. “The aggressiveness the Fed is indicating has really taken us by surprise,” said Mark Cabana, head of US short rates at Bank of America. “This is in line with the recent shift in commentary from the Fed, and it certainly sounds like a Fed that is perfectly fine to risk recession, reducing inflation with restrictive monetary policy.” Cabana said the Fed’s new forecast for fed funds at 4.4% by the end of this year means the central bank is probably going to hike the load rate. He said it could increase 75 basis points for the fourth time in November and half a point in December. Right move Markets see the Fed as making the right move because market expectations for inflation are falling, Cabana said. Fed funds futures are no longer pricing in the rate cut for next year. “It’s really hawkish,” said John Briggs of NatWest Markets. He said the average rates were higher than expected in the Fed’s interest rate forecast. The Fed is “saying it’s front-loaded but they’re staying restrictive all the way through to 2025,” he said. In 2025, the fed funds rate average target is 2.9%. “They’re basically saying that rates have to go higher and faster and even if we cut in 2024 and 2025, they’re still going to be restrictive in 2025. You don’t have until 2025 to go back to neutral. It’s pretty hawkish. It’s a strict three-year policy,” he said. Bond yields on the short end of the Treasury curve, as in the 2-year, climbed Wednesday on the prospect of higher interest rates, but yields on 10-year notes and 30-year bonds ended in the opposite direction. The moves raised an already inverted yield curve where the short end is yielding higher than the longer term bond. This is called a reversal and gives a bearish signal. “I think the main takeaway that I see is really reflected in the market. You have a deep reversal,” said Keith Lerner, Truist’s chief investment officer. “The response we are seeing is that when you peel back the onion, the market is showing you that there are more concerns about the risk of a recession and recession in the economy, which we agree… The risk is higher.” The fed funds rate range, following the latest hike, is 3% to 3.25%, up from minus 0.25% before the hike began last March. The challenge for the already “slowing” market is the reality that all these rate hikes, including today’s one, operate with a lag and must weigh on the economy, even if [the Fed] Pivot into the future,” Lerner said. He added that the economy is already slowing, so investors should quality go ahead and stay on the defensive. The risk of a recession could mean that downward earnings revisions are worse. Maybe, say strategists. Investors should also realize that higher rates in the bond market can put pressure on stocks as investors look for attractive yields elsewhere, Lerner said. “You’re getting paid in the fixed income market and the fixed income market is “becoming more attractive,” he said. Sam Stovall, chief investment strategist at CFRA, said a more aggressive Fed doesn’t mean the market will shy away from a rally in the fourth quarter. The fourth quarter is often positive in a midterm election year, after stocks crater in the typical seasonal pattern in September and early October. “It raises the question that perhaps the worst is not behind us,” Stovall said. He added that the S&P 500 did not hold the key at the 3,803 level on Wednesday, which means it may now test the June lows. On an intraday basis, the S&P 500 fell to 3,636 in June. Stovall said, however, that the market could take some solace in the Fed’s roadmap on rates. “If the Fed sticks to that kind of policy and then gives us the impression that it can be done after that,” he said, “I think the market takes a sigh of relief and starts to feel better.” ” Stovall said he’s less excited about the fourth-quarter rally, but it could still happen. “I’m not giving up on the fourth quarter rally, but it could start with the small case ‘R’,” he said.