By Lewis Krauskopf

NEW YORK, (Reuters) – A volatile stock exchange faces a crucial test next week when the U.S. Federal Reserve will likely raise interest rates and provide more information on its plans to tighten monetary policy in order to combat rising inflation.

The benchmark has fallen by 11.5% in 2022 due to fears about a more hawkish Fed. This is the largest percentage decline in the past half-century. April saw the greatest monthly decline since early 2020’s coronavirus pandemic.

Investors are speculating more aggressively about the Fed’s monetary policy. But many fear that it will fail to maintain the economy’s health as it faces the most severe inflation since nearly forty years.

Investors are also worried about monetary policy because of rising bond yields, the conflict in Ukraine, and recent lockdowns in China. Stocks are also experiencing a historically low six month period.

“We’re going to be in for, I think, more dicey, choppy, volatile markets here for a while longer, just because of the uncertainty,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab (NYSE:) in Austin, Texas, who said that “things turned the other direction right at the beginning of the year,” coming off a strong fourth quarter at the end of 2021.

Many investors expect that the Fed will raise interest rates 50 basis points at Wednesday’s central bank meeting. Investors are waiting for Fed Chair Jerome Powell’s comments about interest rates and the plans of the central bank to reduce its balance sheets. They also want information from Powell on the Fed’s future direction. In March, policymakers increased rates by 25 basis points. This was the first rate increase since 2018.

“If the Fed continues to expect high levels of inflation and they don’t see it moderating in the future, that will be a concern for investors,” said Michael Arone, chief investment strategist at State Street (NYSE:) Global Advisors. It will mean the Fed will keep raising rates and tightening monetary policy as the market expects, but perhaps even more aggressively.

The policymakers agreed to raise the federal funds rates by at least 2.5% before year-end, and this is beyond what will be done next week.

How persistently officials perceive the current pace at which inflation is rising after March’s Consumer Price Index showed an 8.5% annual rise, the biggest increase in more than 40 years. This will play a crucial role in tightening the plans.

Kei Sasaki is senior portfolio manager and stated that signs point to inflation peaking. Northern Trust (NASDAQ:) Wealth Management, “if there is an even more resounding hawkish tone coming out of that meeting, then that could certainly be viewed as negative.”

Investors are preparing for tighter monetary policies, which has led to bond yields jumping this year. The yield on the 10-year Treasury Note rose from 1.5% at 2021’s end to 2.9%.

This has been particularly hard on tech and growth stocks. Their valuations are based on projected cash flows, which can be undermined if investors earn less on risk-free bonds. Since last year’s start, the Russell 1000 has seen a decline of 18%.

Investor sentiment has been deteriorating. According to the American Association of Individual Investors’ latest weekly survey, 59.4% of investors described their stock outlook in six months as “bearish”, which is the highest percentage since 2009.

The Fed’s latest actions may provide some relief after recent market turmoil, provided they do not raise new worries. Following the Fed’s expected rate hike in March, the S&P 500 rallied more than 8% over the ensuing two weeks. Investors will keep an eye out for corporate earnings, following a mixed week that saw megacap stocks report. From Pfizer ConocoPhillips and Starbucks (NASDAQ) will be due next week.

Investors may be more concerned about seasonality as the May calendar shifts to May. The S&P 500’s strongest six months of the year since 1946 have been November through April, when the index has risen an average of 6.8%, according to CFRA.

The index averaged 1.7% growth between May and October. The trends are not as clear in recent years. In the past five years, the S&P 500 has averaged a 7.2% gain in the May-October period versus 5.5% for November-April, according to a Reuters analysis. “I don’t know how important seasonality is going to be this time around,” said Jack Ablin, chief investment officer at Cresset Capital Management.