“We’ll definitely see 75 basis points after this meeting,” Bill Dudley, a former chairman of the Federal Reserve Bank of New York, told CNN.
But interest rates are not the only tool the Fed has. It is also beginning the process of reducing its massive balance sheet after buying billions of dollars in financial assets during the Covid-19 pandemic.
“If the economy continues to overheat and inflation remains stubborn, that’s part of the political matrix,” Joseph Brusuelas, chief economist at RSM US, told CNN Business.
He believes Fed Chairman Jerome Powell should make it clear that if necessary, the Fed could unload bonds at a faster rate and start selling mortgage-backed securities, which could help ease market pressure. real estate.
So-called “shelter” costs are rising at the fastest rate in decades. This is worrisome, as as a source of inflation, it tends to stay.
“By filling up a gas tank, people can look at it and say, ‘Maybe next week it will be cheaper,'” Ronald Temple, co-director of multi-assets and head of U.S. capital at Lazard Asset Management, said. blocked spending for a year or two “.
But increasing the balance sheet, a process known as “quantitative adjustment” or QT, also carries risks. The Fed has never carried out a downsizing.
After swallowing government bonds and mortgages during the Great Recession, the Fed began to reduce its balance sheet, which at the time contained only $ 4.5 trillion in assets, at the end of 2017. It stopped the process in 2019 when the markets panicked.
This time it may be different.
“The last time the Fed tried to do that, there was no inflation,” Temple said.
However, he believes that the effects of quantitative easing are likely to have an impact on the markets. Stocks, bonds, cryptocurrencies – all recovered dramatically when the Fed was in buy mode. What happens when you change course?
“I think investors are underestimating the impact of QT,” Temple said. “Central banks manipulated all markets.”
Layoffs shake vulnerable industries
So far, investors have been concerned about what the future holds for the US economy, and the labor market has remained strong.
U.S. employers added 390,000 jobs in May. This recruitment rate was robust, although slower than in April.
But industries vulnerable to rising interest rates and market rotation are beginning to cut roles. This could bode well for rockier weather ahead.
Coinbase cryptocurrency exchange announced on Tuesday that it will lay off 18% of its employees as the digital currency market collapses.
CEO Brian Armstrong said in an open letter that the “difficult decision” to lay off about 1,000 employees was taken to ensure that “we stay healthy during this economic downturn.” The stock exchange has more than 4,900 employees.
“A recession could lead to another cryptocurrency winter and could last for a long time,” he warned.
Step backwards: Coinbase’s market value has plummeted in recent months. A year ago, the company was worth nearly $ 50 billion. It is now valued at less than $ 12 billion.
Cryptography companies are not the only ones facing the pressure to control costs. Real estate agent Redfin said Tuesday it will lay off about 8 percent of its employees as it struggles with the rapid rise in mortgage rates.
“Mortgage rates have risen faster than at any time in history,” CEO Glenn Kelman told employees. “We could be facing years, not months, of lower home sales.”
Shares of Redfin have fallen nearly 80% to date.
Where does the bear in the bear market come from?
This week, US stocks fell in a bearish market, falling more than 20% from their most recent high in early January.
But why is a forest-dwelling mammal associated with frightened investors pouring shares on Wall Street?
My partner Allison Morrow did some digging. He discovered that the term derives from “bear skin”, which was used in the 18th century as a metaphor for the type of speculative trading known today as short selling, or betting that a stock will go down.
It comes from a proverb that warns against “selling a bear’s skin before it has caught the bear,” according to Merriam-Webster.
Bearskin has shortened to wear, and here we are.
The term was understood after the South Sea bubble of 1720, and again after the 1929 crash that caused the Great Depression.
Another idea is for a bear to attack by sliding its paws down on its prey. Swipe down = stocks go down. It seems as fair a hypothesis as any.
Until next time
Retail sales in the U.S. in May at 8:30 a.m. ET, followed by the June NAHB housing market index at 10 a.m. ET.
The Fed’s latest policy decision will be released at 2 pm ET, followed by a press conference.