Americans fear a recession is either on the horizon or already here, as the economy is getting smaller. The market is doing well.
July was the best month for the S&P 500 since November 2020. The benchmark has been at the highest level in a while. The market pessimism that dragged prices lower through much of the 21st century could be coming to an end.
The economy is in the background. Last week's data showed that the economy had shrunk for a second quarter in a row. Inflation is at four decade highs. Americans' confidence in the economy is near a record low.
The Federal Reserve might have to back off its fight against inflation and lower interest rates if there is a downturn.
Stock valuations are influenced by interest rates. It is cheaper for companies to borrow when rates are lower. Firms' debt burdens can be intensified and the pace of borrowing can be slowed by higher rates.
The Fed has been raising rates in an effort to keep inflation under control. The latest data on the economy has investors shifting their bets. The Fed will have to cut its benchmark rate in order to buoy the economy as traders expect growth to slow so much. The strong upswing started in July.
It is not certain that investors will get the rate cuts they are betting on. Powell said that it will likely be appropriate for the central bank to slow its hiking cycle.
There is plenty of time to slow the pace of increases before the cycle ends. The Fed raised rates by 0.75 percentage points in June and July, which was larger than usual.
The Fed wants to keep raising the benchmark. The central bank's June policy meeting showed participants expecting the federal funds rate to reach 3.4% by the end of the year. That's up from the current range of 2% to 2.5%, suggesting a fourth quarter-percentage point hike at the Fed's three remaining meetings.
The benchmark is expected to go up to 3.8% by the end of 2023, before sliding back to 3.4% in 2024. It's not enough to pull rates low enough to make a big difference in the economy.
During a Wednesday press conference, Powell poured cold water on investors' confidence that a near-term rate cut is in the cards given how hard it is to guess where the economy and inflation will be going in the future. He said that the June estimates from the Fed are the best estimate of what the Fed expects.
Powell said you have to take any estimates of what rates will be with a grain of salt. There is a lot of uncertainty about the path ahead, and it is usually high.
There is no guarantee that investors will get a lower rate. The chances of a Fed pivot are higher now that there are signs of a slowing economy.
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