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On Wednesday, the S&P 500 stock index jumped 3%, as if all was well with the world. Stocks tumbled on Thursday, with the tech-heavy Nasdaq index plunging 5% as if the end of time was in sight.

Things on Friday were only slightly better. The S&P fell again, but only 0.6%, and the Nasdaq only lost 1.4%. It was the S&P 500’s fifth consecutive weekly decline, its longest losing streak since June 2011.

If you’re looking for patterns in the wild swings of the market, the answer is simple: Financial markets are grappling with an astonishing policy shift from the Federal Reserve.

Over the past two decades, financial markets may have become so used to Fed encouragement that they simply don’t know how to react, now that the central bank is doing its best to slow the economy.

But the Fed’s intentions are obvious if you read and listen.

Jerome H. Powell, the chairman of the Fed, stated unequivocally during a press conference Wednesday that the central bank was truly and genuinely committed to bringing inflation down. A transcription of Mr. Powell’s words is available on the Fed’s website. So is the text of the Fed’s latest policy statement. Check for yourself.

The Fed is ready to increase unemployment in the United States if that is what is needed to get the job done. And while they would much rather the US not fall into recession, Fed policymakers are prepared to take the strain if the economy falters.

This can be hard to accept, and for good reason.

Almost since the beginning of the great financial crisis that began in 2008, the accommodative monetary policy of this same Federal Reserve has repeatedly propelled the financial markets to dizzying heights. By cutting short-term interest rates to virtually zero and buying up billions of dollars of bonds and other securities, the central bank kept the financial system from freezing up, and more. It has stimulated corporate activity, effectively reduced yields on a wide range of bonds and encouraged investors to take risks. This drove the stock market up.

These extraordinarily generous policies are at least partly responsible for the current surge in inflation – the worst episode of rising prices since the 1980s.

Yet in its final policymaking meeting on Wednesday, the Fed made it clearer than ever that it had radically changed its policy. This is, of course, extremely difficult for the financial markets to digest.

“It’s a very big change, and the markets are struggling to process it,” Robert Dent, senior US economist for Nomura Securities, said in an interview.

No wonder the markets have lurched wildly, falling one day, rising the next, but trending lower since the start of the year.

“Because the risks facing the economy and facing the Fed are so great, and because the Fed’s responses could be so large, you see very large swings every day,” Dent said. “Swings that a year or 24 months ago would have been very unusual are now the norm.”

However, the current situation is anything but normal.

The Covid-19 pandemic has claimed millions of lives around the world, and counting. From a narrow economic perspective, the pandemic has upended supply and demand for a wide variety of goods and services, confusing policy makers. How much of the current inflation spurt was caused by Covid, and what can the Fed possibly do about it?

Then there are the continued lockdowns in China, which have reduced the supply of Chinese exports and dampened Chinese demand for imports, both of which are changing global economic patterns. Added to this is the oil price shock caused by the Russian war in Ukraine and the sanctions against Russia.

Until late last year, the Fed said the inflation problem was “transient.” Its response to a series of global challenges has been to flood the US economy and the world with money. This helped lessen the impact of the 2020 recession in the United States – and contributed to big wealth-creating rallies in the stock and bond markets.

But now the Fed has recognized that inflation has gotten out of control and needs to be slowed significantly.

That’s how Mr. Powell put it on Wednesday. “Inflation is far too high and we understand the difficulties it is causing, and we are acting quickly to bring it down,” he said. “We have both the tools we need and the determination it will take to restore price stability on behalf of American families and businesses.”

But his tools for reducing the rate of inflation without causing undue damage to the economy are actually quite rudimentary and limited, he later acknowledged, in response to a reporter’s question. “We basically have interest rates, balance sheet and forecasts, and those are notoriously blunt tools,” he said. “They are not capable of surgical precision.”

As if that weren’t bad enough, for such a delicate operation as the Fed is attempting, he added: “No one thinks it will be easy. Nobody thinks it’s simple, but there’s certainly a plausible path for it, and I think there we have a good chance of doing it. And, you know, our job isn’t to assess the odds, it’s to try to make it happen. So that’s what we’re doing.

Good. The Fed has to give it a shot, but given the precariousness of the situation, the high volatility in the financial markets is exactly what I expected.

The Federal Reserve has pledged to continue raising its short-term interest rate, the federal funds rate, to well above 2.25%. Just a few months ago, this rate was close to zero, and on Wednesday the Fed raised it to the range of 0.75 to 1%. The Fed has also said it will start trimming its balance sheet from $9 trillion in June by about $1 trillion over the next year, and it continues to issue ‘forward guidance’. warning – warnings of the type that Mr. Powell issued on Wednesday.

Watch out, he was basically saying. Financial conditions are going to get much tougher – as tough as necessary to keep inflation from taking root and becoming deeply destructive. The Fed will use blunt instruments on the US economy. There will inevitably be damage. People will lose their jobs when the economy slows down. There will be pain, even if it is not wanted.

In the financial markets, short-term traders are unable to understand all this. The daily changes in the markets are about as instructive as the meanderings of a squirrel. But for those with long horizons, the outlook is pretty simple.

A period of heartbreaking volatility is inevitable. This happens periodically in financial markets, but those same markets tend to produce wealth for people who are able to ride out these turbulences.

It’s important, as always, to make sure you have enough money set aside for an emergency. Next, assess your ability to withstand the impact of nasty headlines and nasty financial statements documenting market losses.

Cheap, broadly diversified index funds that track the broader market are taking a big hit right now, but I’m still investing money in them. In the long run, this approach has led to prosperity.

Count on more market madness until the Fed’s fight to beat inflation is resolved. But if history is any guide, chances are you’ll do well if you can get away with it.

Sound produced by Parin Behrooz.