Stocks Week Ahead: What If the Fed Can’t Tame Inflation?

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Members of the Federal Reserve, the central bank tasked with cutting inflation from 8.3% to its target of around 2%, are now raising interest rates in an effort to cool the economy.

That’s okay: Medicine doesn’t have to go down easily if it works fast and works well. But Inflation rates rose sharply Since August 2021 it has been out of the normal 2% – 4% range for a whole year. Now growing distrust of Federal Reserve capabilities and the belief that they have become involved in policy error Ask the question: What happens if the Fed cannot control inflation and we are stuck in a long-term cycle of high inflation and stagnation?
why does it matter: High inflation has led to a multi-layered crisis. At its core, it is a political crisis for Democrats defending their strong majorities in Congress, and a crisis of faith for economists who have misjudged the persistence and importance of price hikes as “Pass” image And they may have missed their chance to move forward on the curve.
More importantly, it is a crisis for the US wallet. The average price of a gallon of gas has exceed 4 dollars in all 50 states for the first time ever. Food prices increased by 9.4%. in April 2022 than in April 2021, which is the largest annual increase in 41 years. The Americans seem to have switched to survival mode: Target and Walmart I reported last week that discretionary spending is falling as customers struggle to cover basics like food, fuel and shelter.
this is different: The Fed is likely to borrow ideas From the 1994 playbookThe last time the central bank successfully raised interest rates and carried out a smooth landing. But things are different now. We are dealing with a serious labor shortage due to the willingness of baby boomers to exit the workforce, a significant drop in the labor participation rate and a slowdown in productivity. Globalization is declining as the pandemic and war in Ukraine have led to major energy price shocks and supply chain disruptions.

“This is uncharted waters for all of us,” said Liz Young, SoFi’s head of investment strategy. “Inflation hasn’t been this high since the year I was born.” She said the economy will recover, but it will be a “slow burn”. She added that the markets will continue to crash, and prices will remain high for a while, adding, “I think we may have to stay there for a short time. I don’t know we will come back out of it very quickly.” “

Confidence in the central bank is also lagging. Investors Calls for a three-quarter point rate hike At the conclusion of the June Fed meeting, despite Fed Chair Jerome Powell’s assurances that a hike this high is not on the table. Even former Federal Reserve Chairman Ben Bernanke The central bank said it was wrong In its approach to tackling high inflation 40 years.

Part of the lack of confidence stems from the increase in social media and broad and fast communications — and it has nothing to do with what is happening at the central bank, said Howard Silverblatt, chief index analyst at S&P Dow Jones Indices. A continuous feed of news and real-time analysts makes it easier to judge the Fed’s actions, not their outcomes.

“You know them much better now,” Silverblatt said. “You see all the nooks and crannies.”

Timing is everything: Inflation rates do not always go down. Just look at the 1970s when the US economy suffered three recessions during which the underlying inflation problem did not go away.

“Stagflation is probably the worst word in vocabulary for financial markets because it is the worst of both worlds. Inflation remains high and the economy slows,” said Leo Grohosky, chief investment officer at BNY Mellon Wealth Management. “I think we’re getting a whiff of stagflation right now.”

But the specter of the 1970s lingers in the minds of all Fed governors, and they have said they will further harden — no matter what that means for markets and the economy.

“The process of bringing inflation down to 2% will also involve some pain, but in the end it will be even more painful if we fail to deal with it and inflation is entrenched in the economy at high levels, we know what Powell said recently. market interview.

Grohosky says he sees inflation continuing for the remainder of this year and some next, but it has not yet taken hold in the economy and will decline by 2023.

However, the sentiment is not the same for investors and consumers. Among economists and analysts, Grohosky said, “there is an expectation that there will be some relief and that we are likely now living in peak inflation.” But consumers “are concerned that today’s inflation rates will continue for much longer.

They may not be wrong. While the prices of some commodities will drop rapidly, energy and housing prices are likely to remain elevated for some time, according to the Federal Reserve.

“We don’t think inflation is entrenched. But we do acknowledge that there is concern, because parts of inflation are more stable than most economists and even the Fed have expected,” Grohosky said.

Davos is back and the world has changed

The World Economic Forum – which famously combines high-end paintings with flashy partying – is back in person in Davos, Switzerland, for the first time in two years. The conference aims to bring important people together to tackle pressing issues such as inequality, climate change, the future of technology and geopolitical conflict. But the logic behind calling on some of the richest people on earth to solve these problems from a resort town seems more shaky these days.

billionaires They added $5 trillion to their wealth during the pandemic, according to a report by Oxfam published in January. The world’s ten richest men have seen their collective wealth more than double. Meanwhile, tens of millions of people around the world have been pushed into it extreme poverty.

The event is taking place against the backdrop of the worst cost-of-living crisis in decades in both advanced and many developing economies. Rising food and fuel prices are already causing hunger and hardship, increasing instability, sparking protests and emboldening political rebels.

The main event will likely be a speech on Monday by Ukrainian President Volodymyr Zelensky, who is expected to participate via video conference. German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen are also scheduled to deliver speeches later in the week, which will be examined as EU countries struggle to agree on a formal oil embargo against Russia.

next one

Monday: Kansas City Federal Reserve Bank President Esther George speaks; Earnings from Zoom Video Communications,

Tuesday: New Home Sales in April; Earnings from Intuit, AutoZone, Best Buy, Toll Brothers, Petco and Nordstrom

Wednesday: Core Durable Goods Orders for April, FOMC Meeting Minutes and Weekly Crude Oil Inventories; Earnings of NVIDIA Corporation, Williams-Sonoma, and Dick’s Sporting Goods

Thursday: First Quarter GDP (Second Estimate), Initial Jobless Claims, Pending Home Sales in April; Earnings from Alibaba, Costco, Dollar General, Dollar Tree

Friday: St. Louis Federal Reserve Bank President and FOMC voting member James Bullard speaks

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