There are likely to be further rate hikes in the coming months because Jerome Powell and the rest of the Fed cannot declare victory against rampant inflation soon, especially as consumer prices rose 8.6% year-on-year until May .
In fact, the chances of a three-quarter percentage point increase on Wednesday, while still a bit remote, skyrocketed after the May CPI report.
“The Fed needs to show determination. It can’t afford to look like it doesn’t have the conviction to deal with this stubborn and persistent inflation. The next two meetings should be half a point increase,” Todd Lowenstein said. chief strategist of The Private Bank at Union Bank.
But Lowenstein acknowledged that there is a growing debate over whether the Fed should slow down rate hikes, or even pause for a meeting later this year to assess the impact of the rate hikes. higher rates in the economy as a whole. There is a gap between when higher rates are announced and when they actually slow down consumer spending.
No doubt a break seems less likely after the May hot inflation report. In fact, traders are now valuing more than a 40% chance of a three-quarter increase in the July Fed meeting. Barclays economists wrote Friday that “it’s an upcoming call” about whether the Fed raises rates so much in June or July.
However, not everyone believes that the Fed should be so aggressive. The Fed has launched a process called quantitative easing, which could curb consumer demand by raising long-term interest rates.
Here’s how it works: As part of the Fed’s 2020 Covid stimulus efforts, the central bank bought massive amounts of mortgage-backed bonds and securities. This so-called quantitative easing has pushed the Fed’s balance sheet to a difficult-to-handle size of nearly $ 9 trillion.
Now, the Fed is developing some of these assets by letting their balance sheet maturity bonds and not reinvesting principal payments on those bonds. This, in theory, should increase long-term returns. This could be another reason why fears of multiple large Fed rate hikes could be exaggerated.
“Quantitative tightening will certainly make long-term rates higher, and I don’t think the market will take that into account. Investors are probably expecting an overly counterfeit Fed,” said Sandy Villere III, St. John’s portfolio manager. Denis J. Villere & Co. “The market reacted in an exaggerated way and this is giving us opportunities to buy some things.”
Villere said the bonds and some small-cap American companies look attractive. But he cautioned that investors should be cautious. There is no guarantee that the Fed will be able to slow down the economy without causing a recession.
“Let’s see if the Fed can do this magic trick and have a soft landing instead of an accidental landing. There’s no doubt the Fed waited too long to react to inflation,” Villere said.
Others worry that the Fed’s large rate hikes will not help reduce inflation, especially as much of the higher prices are due to rising energy costs. And unless the Fed can somehow negotiate a peace deal between Russia and Ukraine, good luck seeing some relief at the bombing anytime soon.
“We were hoping to have reached peak inflation,” said Jay Woods, chief market strategist at DriveWealth. “But the Fed does not control the price of oil and gas. Consumer spending habits will change dramatically.”
Technological canaries in the coal mine?
Technological actions are going through a brutal year. The Nasdaq is in a bearish market as investors worry about the impact of higher rates on Silicon Valley profits. Are the fears justified? Investors will make better sense after two giant software companies, Oracle (ORCL) and Adobe (ADBE), reported gains this week.
Both companies have a large exposure to Corporate America. Oracle is a leader in database and customer relationship management software, while Adobe’s creative tools (PhotoShop, Acrobat, and InDesign to name a few) are used by armies of enterprise graphic designers.
Shares of Oracle and Adobe, like the rest of the technology, have fallen this year. Oracle shares have fallen nearly 25%, while Adobe has fallen more than 30%.
Investors will be watching to see what each company has to say about the outlook for corporate technology spending in the coming months and beyond. They could give Wall Street more clues as to what other cloud software giants are doing, such as Microsoft (MSFT), Google (GOOGL), SAP (SAP) and Amazon (AMZN). they recently recorded strong revenues. But the company cut back on its outlook and also said it plans to be more “measured” about hiring in the future.
Until next time
Monday: Oracle Earnings
Tuesday: US production prices
Wednesday: Retail sales in the US; Federal Reserve Policy Announcement
Thursday: US housing starts and building permits; weekly U.S. unemployment claims; earnings from Kroger (KR), Jabil (JBL) and Adobe
Friday: US industrial production