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Concerns about the Fed’s mistake grow as interest rates are expected to rise this week


Jerome Powell, Chairman of the U.S. Federal Reserve, attends the National Association of Business and Economic Policy Conference in Washington, DC, March 21, 2022.

Yasin Aztyurk | Anadolu Agency Getty Images

The Federal Reserve is tasked with slowing the U.S. economy enough to control inflation, but not enough to turn it into recession.

Financial markets expect the central bank on Wednesday to announce an increase in the Fed’s benchmark interest rate by half a percentage point. The Fed’s rate monitors the amount banks charge each other for short-term loans, but also serves as a pointer to many forms of consumer debt.

Doubts are growing as to whether it will be able to do so, even among some former Fed officials. Wall Street saw another day trade whipsaw on Monday afternoonwhile the Dow Jones Industrial Average and S&P 500 rebounded after falling more than 1% earlier in the session.

“A downturn at this stage is almost inevitable,” former Fed Deputy Chairman Roger Ferguson told CNBC.Squawk Box“In an interview Monday.” It’s a witch’s brew, and I think the likelihood of a recession is unfortunately very, very high because their tool is rough, and all they can control is aggregate demand. “

Indeed, much of the inflation problem drives the supply side in the equation, as demand for goods dramatically outpaced supply during the Kovid-era economy.

After spending most of 2021 insisting that the problem is “transitional” and likely to disappear if conditions return to normal, this year Fed officials were forced to admit that the problem is deeper and more persistent than they acknowledged.

Ferguson said he expects a recession in 2023, and hopes it “will be soft.”

Hiking and “the salvation that accompanies”

This makes the Federal Open Market Committee the main thing this week: not only will politicians almost certainly approve an increase in interest rates by 50 basis points, but they are also likely to circumvent bond cuts accumulated during recovery.

Armchairs Jerome Powell will have to explain all this to the public by drawing a line between the Fed, which has decided to suppress inflation without killing an economy that has recently looked vulnerable to shocks.

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“That means you’ll have to rise enough to maintain credibility and start cutting balance, and he’ll have to survive the recession that’s coming,” said Daniel DiMartina Booth, CEO of Quill Intelligence and chief adviser to former Fed Dallas President Richard Fisher, while he served. “It will be an extremely difficult message to communicate.”

Talk of a recession on Wall Street has intensified slightly recently, although most economists still believe the Fed could boost inflation and avoid an emergency landing. Market prices suggest that an increase of 50 basis points this week should be accompanied by an increase of 75 basis points in June before the Fed returns at a slower pace, which will eventually bring the fund rate to 3% by the end of the year.

But none of this will happen for sure, and it will largely depend on the economy decreased by 1.4% year on year in the first quarter of 2022 Goldman Sachs said it sees reading decline to a 1.5% decline, although it is expected to grow by 3% in the second quarter.

Fears of bad time

There are growing risks in the economy that could thwart the Fed’s plans, said Tom Porcelli, chief US economist at RBC Capital Markets.

“First, while everyone seems to be very focused on data / revenue here and now, which seems to say that at the moment everything is fine, the problem is that there are cracks,” Porcelli said. notes. “Moreover, all this is happening, because inflationary pressures are likely to slow down – and perhaps slow down more than it seems at the moment.”

Monday brought new signs that growth may at least slow: ISM Manufacturing Index for April fell to 55.4, indicating that the sector is still expanding but at a slower pace. Perhaps more importantly, the employment index for the month was only 50.9 – a reading of 50 indicates an expansion, so April showed an almost cessation of employment.

And what about inflation?

Twelve-month readings still record the highest levels in about 40 years. But the brave measure the Fed saw monthly increase of only 0.3% in March. The The Dallas Fed is trimmed averageemitting readings at both ends of the range fell from 6.3% in January to 3.1% in March.

Such figures cause the worst fears on Wall Street, namely that the Fed is lagging behind the inflation curve when it started now, can be just as unruly when it comes to tightening up.

“They’ll repeat,‘ Look, we’ll be sensitive to the data. If the data changes, we will change what is expected of us, “said James Polsen, chief investment strategist at The Leuthold. Group.” Of course, there is a slower real growth. It’s not falling off a cliff, of course, but it’s moderate. I think they will be more sensitive to that in the future. “

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