Possibility of market correction after interest rates rise warns IMF

Wall Street's performance was particularly notable on Monday, with the broad-based S&P 500 down 3.5% before rebounding late in the session and closing with modest gains.

The index is up 27% in 2021, but investors have turned cautious amid rising inflation, prompting the Fed to signal an imminent rate hike, possibly in March.

Global equity markets have seen-sawed in recent weeks but are showing signs of “overvaluation” risking a sharp correction as major central banks raise interest rates, a senior IMF official said on Tuesday.

Gupta said, we are living in very turbulent times, newly installed number two at the International Monetary Fund, adding that “markets look overpriced in many areas. and there is a high level of exuberance. "

The Fed’s exit from highly stimulative monetary policy “is needed given the strength of the U.S. recovery and the inflationary pressures we are seeing,” Gopinath told reporters.

She further went on to add, "One would expect that as interest rates rise, we will see corrections in the markets. Hopefully, this will stay orderly. There remains a lot of uncertainty as to how many times the Fed will raise rates to contain the price increases, and that will weigh on markets.”

But as long as the Fed's measures "telegraph well" and officials explain the rationale, that should help have a smoother correction in the markets.