Laws in the United States are still firmly entrenched, but there are growing fears that they are loosening. The fear is that people will abandon the Federal Reserve’s ability to tame the currency, and that will drive prices higher.
“You’re going to have to be very careful,” former Fed Chair Ben Bernanke said of policymakers last week.
“They clearly want inflation to come down at a reasonable pace.”
People see gas and food prices going up every week, and that will affect the direction they think prices are headed. “So we don’t know how much time the Fed has,” Bernanke said.
The Fed will be forced to take more aggressive action if prices do not fall as persistent inflation challenges its credibility.
St. Louis Fed Chairman James Bullard, who has always been a hawkish man, believes the Fed’s federal funds rate needs to hit 3.5% by the end of the year, which would preclude several aggressive rate hikes of half a point – or more – could entail the current level of almost 1%.
Current Fed Chair Jerome Powell has ruled out a 75 basis point hike, but Bullard believes that cannot be ruled out. In an interview with Fox News, Mr Bullard said:
“The more we can act ahead of time and control inflation and inflation expectations, the better off we will be. If the Fed manages to control expectations, it can cut rates again in 2023 and 2024.”
As recession fears mount in financial markets, Bullard still believes the Fed can land a soft landing and avoid a prolonged downturn.
He believes the economy can “move forward,” fueled by consumption, but there are many signs consumers are pulling back amid inexorably soaring prices.
(NYSE:) and . (NYSE:) saw earnings slump and share prices as it reported a rise in inventories.
(NYSE:) are more resilient, however. Retailers find the surge in inflation unusual. The picture remains mixed as different income groups respond differently.
Last week, however, Mr Powell remained optimistic, saying there was “clear and compelling evidence” that inflation was coming down. He believes the job market will be strong, although some consumers may suffer from inflation and rising interest rates.
The Federal Open Market Committee plans to make hikes of half a point each in June and July, bringing the federal funds rate to 1.75% and 2%. The Fed will remain flexible, Powell said last week, raising or slowing rates as needed.
Financial markets are awaiting action from the Fed to mitigate losses for stock market investors. But as Powell insists that the Fed will continue its rate action until inflation is crushed, that hope is fading.
Stocks are very close to a bear market, falling 19% on Friday, just a hair’s breadth from the 20% drop that defines a bear market. Analysts lowered their threshold for Fed action on the index, which closed at 3,901.36 on Friday, from 3,700 to 3,529, down 26% from January’s closing high.
Some analysts are forecasting a drop to 3k by October in an extended bear market.
The personal consumption spending index, widely considered the Fed’s favorite indicator of inflation, is released on Friday. The April index is expected to fall to 4.9% yoy from 5.2% in March. A worse-than-expected reading, as one analyst laconically put it, “could trigger a sharp sell-off.”
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