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Economy News and Stock Market Updates


At Wednesday’s Fed meeting, coupled with warnings of pain to come, policymakers outlined a hopeful scenario in which they could bring inflation down smoothly, while the economy weakened while remaining resilient.

Not everyone in the market agrees.

In particular, traders and analysts closely watching the direction of interest rates said they were bracing for a more dire outcome than the Fed had projected.

“The market believes that the Fed’s economic forecasts are an unrealistic fantasy,” said Mark Cabana, director of US rates strategy at Bank of America.

Interest rate traders have taken a hit this year as the Fed’s outlook for inflation and interest rates has been repeatedly altered by reality. The central bank this week raised interest rates by three-quarters of a percentage point, its third such increase since June. The Fed’s policy rate is now the highest since 2008, well above forecasts at the start of the year. And policymakers predict it will move even higher as the central bank steps up its campaign to bring down stubbornly high inflation.

After the Fed announced its decision, traders responded quickly, adjusting prices in a variety of interest rate markets, such as government bonds and futures, to reflect the new bullish path, but there the market alignment ended. with the central bank.

Instead, market prices reflect what many analysts expect to happen. Although the Fed does not forecast to lower interest rates until 2024 at the earliest, analysts are betting that the central bank will have to do so next year. The belief is that the Fed’s aggressive rate hikes will push the US economy into recession, slowing economic growth and dragging down inflation faster than the central bank predicts. That, in turn, is likely to force the Fed to change its approach to fighting inflation and start cutting interest rates late next year to support a failing economy.

“The market thinks the economy will slow faster than the Fed,” Cabana said. “The market thinks that will slow down inflation faster than the Fed. And the market thinks that will move the Fed from tackling inflation to stimulating growth.”

Stocks slumped on Friday, on track for a second straight week of losses, as investors pulled $4 billion from funds buying US stocks during a seven-day period ending Wednesday, according to EPFR Global, a provider. of data.


Data delayed at least 15 minutes

Source: FactSet

Higher interest rates increase costs for businesses and consumers, which generally weighs on share prices. And the Fed wasn’t the only central bank to raise interest rates this week, as lawmakers in Europe and Asia acted in tandem.

“We will probably end up in a worse economic situation than the Fed is currently projecting,” said Kate Moore, CEO of BlackRock.

In particular, analysts said the Fed’s expectation of accelerating economic growth next year, rising to 1.2 percent from a forecast of 0.2 percent for 2022, was inconsistent with interest rates so dramatically higher. . Analysts at Barclays said the growth projection was “difficult to reconcile” with slowing spending and “increasing drag from tightening financial conditions.” As higher rates drive up costs for businesses, spending falls, hiring slows and unemployment rises.

The Fed hopes that it can simply extinguish job openings without significantly increasing unemployment. However, some analysts doubt that the jobless rate can stay as low as the 4.4 percent projected by the Fed at the end of next year. TD Bank forecasts unemployment at 4.8 percent by the end of next year. Bank of America expects 5.6 percent by the end of 2022.

Its worsening economic outlook means analysts expect inflation to fall faster, with a recession reducing consumer and business demand faster than a milder slowdown. That also paves the way for the Fed to cut interest rates to support the economy, something it has said it will only do once it is sure inflation returns to its 2 percent target.

Futures prices currently forecast a rate of around 4.3 percent by the end of 2023, down from a high of around 4.6 percent earlier in the year and implying a quarter-point cut in the second half of the year.

However, not everyone agrees with market prices. Goldman Sachs’ forecasts align closely with those of the Fed, and analysts at the bank predict that interest rates will remain elevated over the next year, with inflation proving difficult to contain. Lauren Goodwin, an economist at New York Life Investments, said she also expected inflation to remain too far from the Fed’s target of 2 percent for the central bank to consider cutting interest rates. Instead, Goodwin said, it is the market’s hope for lower rates that is “optimistic and I think overly optimistic.”

Part of the challenge for the Fed is accurately forecasting how rate hikes will affect the economy with so many other global forces at play. In addition to the actions of other central banks, Russia’s ongoing war with Ukraine continues to have an impact on food and energy prices, even as supply chain constraints continue to fuel inflation during the pandemic, and some emerging economies are on the verge of crisis. .

Members of the Fed’s committee that sets monetary policy have acknowledged such uncertainty. In their forecasts, they are asked to “indicate their judgment of the uncertainty associated with their projections relative to levels of uncertainty over the past 20 years,” and anonymous responses must be a binary choice between greater or less. All participants, across all forecasts (GDP, inflation and unemployment) responded “higher”, the first time that has happened since March 2020 and the start of the coronavirus crisis.

“We don’t know, nobody knows, whether this process will lead to a recession or, if so, how significant that recession would be,” Fed Chairman Jerome H. Powell said Wednesday.

For Cabana, such a high level of uncertainty, coupled with such rapid interest rate increases designed to stifle the economy, is disconcerting.

“We just think the Fed has reflected that they have the most uncertainty about how the economy is going to play out,” he said. “If you were to drive a car at 75 miles per hour with uncertainty as to where the road is going, then you have a very good chance of being in an accident.”



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