Stock market updates: Fed rates, inflation and more for June 16, 2022

On Wednesday, investors assured themselves that the Federal Reserve would do whatever was necessary to bring inflation under control, resp...


On Wednesday, investors assured themselves that the Federal Reserve would do whatever was necessary to bring inflation under control, responding to Fed Chairman Jerome H. Powell’s rallying cry by driving stock prices higher.

A day later, reality sank.

Stocks fell on Thursday as investors accepted what the Fed’s tougher stance meant for the economy: higher interest rates and the growing likelihood of a recession.

The S&P 500 closed more than 3% lower, part of a global pullback that saw stocks in Europe also post steep declines as central banks in other countries hiked rates. With Thursday’s decline, the S&P 500 is now nearly 24% below its Jan. 3 high, plunging deeper into the bear market which officially started on Monday.

If stocks continue to fall over the next two weeks, the three-month period ending June 30 could ultimately be the index’s worst quarter since 2008, when the collapse of Lehman Brothers triggered the global financial crisis. .

The fall reflects a harsh reality for companies and their shareholders: the fastest inflation in four decades is undermining consumers’ purchasing power and driving up the cost of materials, transportation, labor and everything that goes into running a business. But the Fed’s efforts to combat it could, at least in the short term, turn out to be even worse: by raising rates, the Fed hopes to cool demand enough to curb inflation – but the risk is that it will do so. too much, tipping the economy into a recession.

“Inflation isn’t going to come down anytime soon, and it’s going to take some kind of slowdown in the economy for that to happen,” said Wells Fargo chief economist Jay Bryson. “It’s a really delicate situation.”

Until this week, Mr. Bryson and his team were still betting that the United States could avoid a recession. But after another faster-than-expected inflation report on Friday, and the inevitable that the Fed would become more aggressive as a result, they capitulated: On Wednesday, moments after Mr. Powell had finished speaking, Wells Fargo sent a note to clients predicting that a recession would begin next year.

The Fed announced on Wednesday its biggest rate increase in decades. It was a vigorous effort – albeit belated, according to some economists – to contain inflation which has proven more serious and more persistent than most forecasters had predicted a year ago. Other central banks are following suit: the bank of england announced its fifth consecutive interest rate hike on Thursday, and the Swiss central bank raised its interest rate for the first time in 15 years, a more aggressive decision than expected.

Europe’s Stoxx 600 index fell 2.5%, its seventh drop in eight days. The FTSE 100 in London fell 3.1%. The S&P 500 fell 3.3%. Thursday’s concern was also evident outside the stock market. Copper and oil prices, which historically serve as gauges of sentiment toward the global economy, traded lower.

Policymakers hope that by raising the cost of borrowing for consumers and businesses, they can reduce demand for goods and services and buy time for disrupted supply chains and labor markets. by the pandemic are returning to normal.

But lowering demand, inevitably, means causing economic hardship. If consumers want fewer goods and services, businesses will have less revenue and need fewer employees, which means slower wage growth and, in all likelihood, more layoffs.

It seems that the recovery, so far among the strongest on record, is running out of steam. The once hot housing market has cooled rapidly mortgage rates have increased. Costs government data showed that builders in May opened the fewest new homes in more than a year.

Average mortgage rates have nearly doubled this year to about 5.8% Thursdayjust over 3 percent. Consumers can also expect to pay more on credit card debt, car loans and some student loans.

And retail sales fell in May for the first time this year as sky-high gasoline prices and rising borrowing costs ate into consumer budgets. The bear market is likely to aggravate dismal consumer attitudes.

“Already, households have been squeezed by incredibly high inflation,” said Beth Ann Bovino, chief U.S. economist at S&P Global. “You just have to pick up your car at the gas station and feel the pain. That means those high prices, both especially with food and fuel, mean a lot of paychecks go to the essentials, with very little left to spend elsewhere. People feel the pain and are frustrated by it.

Forecasters have regularly downgraded their outlook for economic growth for the coming months. IHS Markit estimated on Thursday that gross domestic product grew at an annual rate of just 0.8% in the current quarter; last week they were calling for a growth rate of 2.4%. A forecasting tool from the Federal Reserve Bank of Atlanta has an even more pessimistic prediction: 0.0%.

Such gloomy forecasts offer the possibility that the economy will end up contracting this quarter for the second time in a row – a common, albeit official, definition of a recession. The National Bureau of Economic Research, the nation’s semi-official arbiter of the start and end of business cycles, offers a more nuanced definition of a recession, calling it “a significant drop in economic activity that spreads throughout the economy and lasts for more than a few months.” Most economists agree that, by this definition, a recession has not yet begun.

Powell argued on Wednesday, as he has in the past, that the Fed can bring inflation down without causing a recession, though he acknowledged that his ability to do so depends on factors beyond his control. its control, such as gas prices, the pandemic and the war in Ukraine. Many analysts doubt that such a “soft landing” is realistic. After Mr Powell’s comments, economists at Deutsche Bank called those hopes “overly optimistic”.

However, even if the Fed succeeds, that does not guarantee a quick market recovery. Inflation is expected to decline only slowly. Fed officials themselves think it will remain high at least until the end of the year. However, the economy could slow quite quickly. Europe, which was experiencing slowing growth even before Russia invaded Ukraine and which has been hit even harder by soaring energy prices, is particularly vulnerable to such a period of “stagflation”. – a portmanteau of the words stagnation and inflation, used to describe periods of high unemployment and rising prices.

Analysts say the stock market is unlikely to regain its footing until there are clear signs that inflation is starting to get under control, which in turn would relieve the Fed from raising rates quickly. Stocks rallied briefly in late May, ending a seven-week losing streak as data appeared to show consumer price gains had peaked. But the sell-off started again last week after a new report on the Consumer price index showed inflation accelerating again, jumping 8.6% in May from a year earlier.

“Only when it is clear that the US has seen a spike in inflation should concerns about the path of Fed hikes ease significantly,” wrote Jane Foley, strategist at Rabobank, in an email. “Meanwhile, market sentiment should remain marked.”

The last time the Fed had to raise rates quickly to control inflation, in the late 1970s and early 1980s, it caused what was at the time the worst recession since the Great Depression. But economists are optimistic that the pain this time will not be as severe, partly because inflation has not yet become rampant.

Still, Bryson noted that recessions, once they start, often prove difficult to escape.

“Touch wood, you don’t need to go through the same depth of recession that we had in 1981, 1982 to eliminate inflation from the economy today,” he said. “The problem, however, is that the stress of an economic downturn often brings out imbalances that until then were largely undetected.”

Jason Karaian contributed report.

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Newsrust - US Top News: Stock market updates: Fed rates, inflation and more for June 16, 2022
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