Stocks for the week ahead: What if the Fed can’t control inflation?

The Fed, charged with reducing inflation to a target of around 2% from 8.3%, is now raising interest rates to try to cool the economy.

That’s okay: if the drug works quickly and works well, the drug doesn’t have to be given up so easily.but Inflation has risen sharply Since August 2021, the normal range of 2% to 4% has been exceeded for the entire year.More and more distrust Fed capacity and believe that they have become entangled in a policy error The question is raised: what happens if the Fed can’t control inflation and we get stuck in a long cycle of inflation and recession?
Why it matters: Record high inflation has created a multi-layered crisis. Essentially, it represents a political crisis for Democrats defending their outright majority in Congress, and a crisis of faith for economists who misjudge the persistence and importance of price increases. “Short” blip And may have missed opportunities for a lead.
Above all, this is a crisis for the American wallet.The average price of a gallon of gasoline is over $4 For the first time ever in all 50 states. Food prices rose 9.4% April 2022 is the largest annual increase in 41 years compared to April 2021. Americans seem to have switched to survival mode: Target and Walmart It was reported last week that discretionary spending is shrinking as customers struggle to pay for basic living expenses such as food, fuel and shelter.
This is different: The Fed may be borrowing ideas From his 1994 screenplay, the last time the central bank successfully raised interest rates and performed a soft landing. But things are different now. We are dealing with a severe labor shortage caused by baby boomers preparing to exit the labor market, a significant drop in labor force participation due to the pandemic, and slowing productivity. Globalization is going backwards as the pandemic and war in Ukraine have caused wild swings in energy prices and disrupted supply chains.

“These are uncharted territory for all of us,” said Liz Young, director of investment strategy at SoFi. “Inflation hasn’t been this high since the year I was born.” The economy will recover, she said, but it will is “slow burn”. The market will continue to tumble and prices will remain high for some time, she added: “I think we may have to stay there for a while. I don’t know if we’ll bounce back from it any time soon.”

Trust in central banks also lags.Investors are Call for rate hikes by three-quarters At the end of the Fed’s June meeting, despite assurances from Fed Chairman Jerome Powell that such high gains would not be taken into account.Even former Federal Reserve Chairman Ben Bernanke The central bank is wrong The solution to 40 years of high inflation.

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said part of the lack of confidence was due to the proliferation of widespread and rapid social media and communication channels — which had nothing to do with central banks. The constant real-time feed of news and analysts makes it easier to judge the Fed’s actions rather than its results.

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

Timing is everything: Inflation doesn’t always go down. Look at the 1970s, the US economy went through three recessions, and the underlying inflation problem never went away.

“Stagflation is probably the worst word for financial markets because it’s the best of both worlds. Inflation is high and the economy is slowing,” said Leo Grohowski, chief investment officer at Bank of New York Mellon Wealth Management. “I think we’re smelling stagflation right now.”

But the specter of the 1970s haunts the minds of all Fed governors, who say they will intensify their hawkishness — whatever that means for markets and the economy.

“The process of getting inflation down to 2 percent will also include some pain, but ultimately the most painful thing will be if we fail to deal with it, and inflation is so ingrained in a high-level economy that we know it’s like,” Powell said recently. once market interview.

Grohowski said he thinks inflation will persist for the rest of this year and part of next year, but it has not yet become entrenched in the economy and will decline in 2023.

Still, investor and consumer sentiment is not the same. Economists and analysts believe that “people are expecting some relief, and we are now most likely to pass the inflation peak,” Grohowski said. But consumers “are concerned that inflation will last longer today. time.

They may not be wrong. While prices for some commodities will fall quickly, energy and home prices are likely to remain high for some time, the Fed said.

We don’t think inflation is entrenched,” Grohowski said. “But we acknowledge there are concerns because some inflation is stickier than most economists and even the Fed expect.

Davos is back, the world has changed

The World Economic Forum – known for combining classy panels with flamboyant parties – is back in Davos, Switzerland for the first time in two years. The conference aims to bring together key figures to address pressing issues such as inequality, climate change, the future of technology and geopolitical conflict. But the logic behind inviting some of the richest people on the planet to solve these problems from resort towns looks more shaky these days.

billionaire Added $5 trillion to their wealth During the pandemic, according to a report released by Oxfam in January. The combined wealth of the 10 richest men in the world has more than doubled.At the same time, tens of millions of people around the world have been pushed into extreme poverty.

The event comes against the backdrop of the worst cost-of-living crisis in decades in developed and many developing economies. Soaring food and fuel prices have created hunger and hardship, fueled instability, sparked protests and encouraged political insurgents.

The main event is likely to be Monday’s speech by Ukrainian President Volodymyr Zelensky, who is expected to attend via video conference. German Chancellor Olaf Schultz and European Commission President Ursula von der Leyen are also scheduled to make speeches later this week, which will be subject to remarks as EU countries struggle to agree on a formal oil embargo against Russia review.


on Monday: Kansas City Fed President Esther George speaks; Zoom Video Communications earnings,

Tuesday: April new home sales; gains from Intuit, AutoZone, Best Buy, Toll Brothers, Petco and Nordstrom

Wednesday: April core durable goods orders, FOMC minutes, weekly crude inventories; gains from NVIDIA Corporation, Williams-Sonoma and Dick’s Sporting Goods

Thursday: Q1 GDP (2nd Estimate), Initial Jobless Claims, April Pending Home Sales; Alibaba, Costco, Dollar General and Dollar Tree Earnings

Friday: James Bullard, president of the Federal Reserve Bank of St. Louis and voting member of the FOMC, speaks

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