Stocks stagnate despite fears of further big Fed rate hikes

New York
CNN Business

Wall Street only cares about one thing right now… and it’s not earnings, the state of the labor market, resilient consumer spending, or the spectacular FTX/crypto crash. Investors are laser-focused on the Federal Reserve and what central bankers are saying about inflation and rates.

Look what stocks did on Thursday. The Dow fell earlier in the day but was up about 40 points, or 0.1%, by midday.

The market was volatile due to comments from St. Louis Fed President James Bullard on the possibility of much larger interest rate hikes. The S&P 500 and Nasdaq were each flat after falling shortly after the opening bell.

Bullard said at an event in Louisville, Kentucky that “inflation remains at an unacceptable level.” As a result, he suggested that the Fed’s main short-term interest rate, which currently sits in a range of 3.75% to 4%, may need to climb as high as 7%. He noted in a chart that the rates should probably be 5% minimum.

The market does not expect rates to rise that high.

Current forecasts for CME federal funds futures call for a half-point rate hike in December and another half-point hike in February before the Fed eventually pauses. That would leave rates in the 4.75% to 5% range…and many investors expect rates to stay there or drop slightly by the end of 2023.

But more promising labor market data can also complicate matters. Weekly jobless claims fell slightly from a week ago, another sign that the Fed can likely remain hyper-focused on inflation and continue to hike rates without worrying about the potential slowdown that rate hikes will have. could have on the economy as a whole.

“This is another example of the market uncertainty created by the strange dynamic where good economic news becomes bad news due to the Fed’s mission to bring inflation down to 2%,” Louis Navellier said. , president of Navellier & Associates, in a note to investors. Thursday.

Investors are clearly worried about the possibility that inflation, despite recent signs of slowing, will remain high enough that the Fed feels compelled to continue to aggressively raise interest rates until prices fall by more dramatically.

“Price increases have been particularly strong for basic necessities like food, transportation and housing, which make up a substantial share of household budgets for people at the bottom of the wage scale,” the government said on Thursday. Fed Governor Philip Jefferson in a speech in Minneapolis.

“Low inflation is essential to achieving a long and sustained expansion – an economy that works for everyone,” Jefferson added.

Jefferson did not comment specifically on how much he thinks rates need to rise to get inflation under control.

Still, Thursday’s market selloff shows that Wall Street remains jittery about the likelihood that rates won’t be close to a peak just yet.

“If we still have millions of job vacancies and inflation above rates, the Fed may need to continue to hike beyond February,” said Edward Moya, senior market analyst for the Americas at Oanda. , in a report Thursday.

But it’s also worth noting that Jefferson and Bullard’s comments don’t carry as much weight as the remarks of Fed Chairman Jerome Powell and Vice Chairman Lael Brainard. Both have recently made comments suggesting they believe the Fed will soon be able to scale back future rate hikes.

Investors should also take Bullard’s comments in particular with a grain of salt. On the one hand, he is known to be one of the more hawkish members of the Fed, which means he has generally advocated more rate hikes in order to contain inflation.

Additionally, Bullard has a vote on rate hikes at the Fed’s next meeting in December, but he has no say in interest rates in 2023.

The Fed’s Open Market Committee, which decides what happens to rates, has twelve members. The seven governors of the Fed and the president of the New York Fed still sit on the FOMC. The other four FOMC participants come from a rotating cast of regional Fed chairmen. The St. Louis Fed president won’t get another vote until 2025.

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