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Economy News and Stock Market Updates

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At the Federal Reserve on Wednesday, with warnings of pain ahead, policymakers expressed hope that inflation could be moderated while maintaining resilience, even as the economy weakened. I have outlined a scenario.

Not everyone in the market agrees.

In particular, traders and analysts watching the direction of interest rates said the Fed expected a more dire outcome than expected.

“The market thinks the Fed’s economic projections are an unrealistic illusion,” said Mark Cabana, head of U.S. rates strategy at Bank of America.

Rates traders have been hit hard this year as the Fed’s inflation and interest rate forecasts have been repeatedly reversed in reality. The central bank has raised interest rates by three-quarters of a percentage point this week. This is his third raise since June. The Fed’s policy rate is now at his highest level since 2008, well above forecasts made at the beginning of the year. And policymakers expect it to rise further as central banks escalate their campaigns to bring down stubbornly high inflation.

After the Federal Reserve announced its decision, traders responded quickly, adjusting prices across a range of interest rate markets such as Treasuries and futures to reflect the new higher path. But the link between markets and central banks ended there.

Instead, market prices reflect what many analysts expect. The Fed doesn’t forecast a rate cut as early as 2024, but analysts expect the central bank to do so next year. Aggressive interest rate hikes by the US Federal Reserve (Fed) are believed to plunge the US economy into recession, slowing economic growth and lowering inflation faster than central bank forecasts. This could force the Fed to shift its focus away from fighting inflation and start cutting interest rates by the end of next year to support a sluggish economy.

“The market thinks the economy will slow down faster than the Fed,” Kavanagh said. “The market thinks it will slow inflation faster than the Fed. And the market thinks it will turn the Fed from tackling inflation to stimulating growth.”

Stocks plunged Friday, their second straight week of losses, as investors withdrew $4 billion from funds buying U.S. stocks in the seven days through Wednesday, according to data provider EPFR Global.


Data lags more than 15 minutes

Source: Factset

Higher interest rates increase costs to businesses and consumers, and typically weigh on stock prices. And his Fed isn’t the only central bank to raise rates this week, policymakers in Europe and Asia are all working together.

“The economy is likely to be worse than the Fed currently anticipates,” said Kate Moore, managing director at BlackRock.

In particular, analysts said expectations that the Fed would accelerate economic growth next year, rising to 1.2% from the 0.2% forecast for 2022, are at odds with such dramatically higher interest rates. Analysts at Barclays said growth projections were “difficult to adjust” due to slowing spending and “increasing drag from tightening financial conditions”. Higher interest rates raise business costs, reduce spending, slow hiring, and increase unemployment.

The Federal Reserve just hopes it can cut job openings without significantly raising the unemployment rate. But some analysts don’t believe the unemployment rate can stay as low as the Federal Reserve’s forecast of 4.4% by the end of next year. TD Bank expects the unemployment rate to hit 4.8% by the end of next year. Bank of America sees him 5.6% by the end of 2022.

A weaker economic outlook means analysts expect inflation to fall more quickly. It also paves the way for the Fed to cut interest rates to support the economy, saying it will only do so if it is confident inflation will return to its 2% target.

Futures prices are currently forecasting a rate of around 4.3% at the end of 2023. That’s down from a peak of about 4.6% at the start of the year, and means he’ll cut a quarter of a percentage point later this year.

However, not everyone agrees with the market pricing. Goldman Sachs’ forecasts are broadly in line with his Fed forecasts, with analysts at the bank predicting interest rates will continue to rise over the next year and inflation will be hard to contain. New York Life Investments economist Lauren Goodwin said he expects the central bank to even consider cutting rates because inflation is too far from the Fed’s long-standing 2% target. Instead, Goodwin said it was the market’s hopes for lower interest rates that “we are optimistic, and I think we are too optimistic.”

One of the challenges for the Fed is accurately predicting how rate hikes will affect the economy. The ongoing war with Russia and Ukraine, along with actions by other central banks, has left some emerging economies on the verge of a crisis as supply chain constraints that fueled inflation during the pandemic remain. continue to affect food and energy prices despite .

Members of the Fed’s committees, which determine monetary policy, acknowledge such uncertainty. In their projections, they were asked to “state your judgment of the uncertainty associated with your projections relative to the level of uncertainty over the past 20 years,” with anonymous responses either high or low. It must be either one or the other: All participants answered “higher” for all forecasts of GDP, inflation and unemployment. This is the first time since March 2020 and the outbreak of the coronavirus crisis.

Fed Chairman Jerome H. Powell said Wednesday, “No one knows if this process will lead to a recession, or how deep a recession will be if it does.”

For Kavanagh, such a high level of uncertainty and such a rapid rise in interest rates designed to stifle the economy is disconcerting.

“I think the Fed reflects that there is the greatest uncertainty about how the economy will develop,” he said. If you drive at 120 km/h, your chances of getting into an accident are very high.”

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