traders investors and strategists were adding one more factor to the list of reasons why financial markets may be in for more volatility through at least the next three to four months the likelihood that fed rate hikes won’t put a dent in inflation by then  wednesday’s price action reflected the continued anxiety gripping the stock market with all three major indexes sporting sharp losses the dow jones industrial average djia dropped nearly 1000 points while the sp 500 spx fell over 3 amid a flight to safety in government bonds as investors reassessed fed chairman jerome powell’s hawkish comments from tuesday and his reassurance that there were plausible paths to a “softish” landing read why are stocks falling fragile ‘bear market’ bounce underlines investor jitters  equities had already been roiled in the past two weeks since the fed’s may 4 decision to deliver a 50 basis point hike its biggest rate increase in 22 years a day after the fed’s move dow industrials dropped almost 1100 points and along with the nasdaq composite index comp  scored its worst daily percentage drop since 2020 on signs of panic selling on wall street this year’s selloff in stocks has left all three major indexes nursing doubledigit losses  what has yet to be fully considered in financial markets is the notion that us inflation at 83 as of april but still near a fourdecade high may fail to respond to the fed’s rate hikes through this summer according to traders strategists and investors typically it takes anywhere from six to nine months and even up to two years for rate hikes to work their way through the economy but that policy lag may be lost on markets accustomed to years of easy money and growing more uneasy by the day though the fed’s effort to shrink its almost 9 trillion balance sheet adds an additional layer of tightening to financial conditions it doesn’t start until june 1  “the meaningful impact of rate hikes will likely be felt toward the end of this year” said david petrosinelli a senior trader at insperex in new york which has underwritten more than 670 billion in securities meanwhile the fed is “losing the room’’ or public confidence “pretty quickly because there’s really no light at the end of the tunnel on inflation’’  “we are in the first or second innings of market volatility because it’s not just what the fed is doing is it’s what the fed is not doing” he said via phone referring to the policy makers’ decision to not begin shrinking its portfolio until next month “there’s growing skepticism about powell and the fed’s current game plan the window or corridor for a soft landing is narrowing by the day and there’s a growing scenario in which inflation doesn’t meaningfully abate during the next few months of fed hikes”  as of wednesday traders of derivativeslike instruments known as fixings were pricing in at least five more annual headline inflation rates above 8 based on the consumerprice index reports for may through september that’s largely due to higher energy costs and reflects a notable shift from where expectations stood on may 6 when traders foresaw inflation starting to fall below 8 in june the table above reflects the projected gain in the annual headline cpi rate versus the yearearlier period five months of 8plus readings are now being penciled in even though powell reiterated on tuesday that half a percentage point interest rate increases at both the fed’s june and july meetings remains the baseline case  just two weeks ago on may 6 traders expected inflation to fall below 8 sooner   in remarks made at a wall street journal event on tuesday powell sought to reassure the public that there are “plausible paths” to a “softish” landing for the economy even if there may be some “pain” ahead if necessary he said the fed wouldn’t hesitate to push rates past “broadly understood levels of neutral” or level at which policy neither boosts nor slows economic growth to bring down inflation powell said the fed would keep raising rates until there was “clear and convincing evidence” that inflation was coming down the fedfunds rate target currently stands at 075 to 1  for now financial markets are of four different minds when it comes to inflation said jim vogel an interestrate strategist at fhn financial in memphis the bond market is “leaning toward the idea of the fed being successful though it’s uncertain about the timing” the stock market “almost wishes the fed isn’t successful” because of the idea that higher inflation can help some stocks outperform vogel said in a phone interview “commodities are confused” and the forward inflation market “is torn between a fed that can be successful but not for an extended period of time”  the problem he said is that even if fed rate hikes reduce demand “on the margin” policy makers are “going to be ineffective’’ in addressing the following factors structural demand for workers supplychain disruptions from russia’s war on ukraine and china’s zerotolerance policy on covid19 and the need by businesses to redirect their “time energy and money” into regionalizing some of their investments and operations those dynamics “accelerate inflation in the short run though inflation could resolve itself on its own over a longer term” vogel told marketwatch meanwhile “there’s more room to run in the equities selloff as investors punish stocks with international exposure and financial markets will be prone to bouts of illiquidity and mild panic”  regardless of which inflation outcome is correct according to vogel the treasury curve will keep flattening with some spreads like the one between 3 tmubmusd03y and 10year rates tmubmusd10y potentially inverting by as much as 20 to 30 basis points at some point depending on how global geopolitical conditions play out this fall “we could be looking at an environment that easily lasts through 2023 with fed policy being latent through the first half of 2024”  read wild swings in stocks and bonds offer taste of more volatility to come given the risk us inflation keeps rising  petrosinelli of insperex sees a chance that the 10year rate could move toward 4 from wednesday’s level around 291 in the second or third quarter taking a bite out of tech stocks while the treasury curve inverts again as of afternoon trading treasury yields were lower as investors flocked to government bonds shrinking the spread between 2 and 10year rates to 24 basis points in a worrisome signal about the outlook   walgreens boots alliance inc wba  walmart inc wmt  and the home depot inc hd were among the dow’s biggest losers while shares of retailer target corp tgt plunged more than 25 on wednesday after it reported a big earnings miss amid deepening broadbased pessimism in markets  “we’re a little more optimistic about inflation peaking in the fall and see no recession happening in the us” said jay hatfield chief investment officer of infrastructure capital advisors in new york a manager of exchangetraded funds and hedge funds that oversees around 118 billion in assets he sees the 10year remaining around 3 and stocks staying rangebound  but in a nonbase case scenario in which markets suspect that the fed is ineffectual which he puts 20 to 30 odds on coming to fruition the 10year rate could climb to as high as 35 or 4 and “our estimate of the fair value on the sp 500 spx would drop to 3500” from its current level near 3959 on wednesday hatfield said via phone