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Fed Watch: Bear Market Looms As Central Bank Seeks To Tame Inflation

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewMay 23, 2022 03:51AM ET
www.investing.com/analysis/fed-watch-bear-market-looms-as-central-bank-seeks-to-tame-inflation-200624685
Fed Watch: Bear Market Looms As Central Bank Seeks To Tame Inflation
By Investing.com (Darrell Delamaide/Investing.com)   |  May 23, 2022 03:51AM ET
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Inflation expectations in the US are still anchored, but worries are growing that they could become untethered. The concern is that people will give up on the Federal Reserve’s ability to tame inflation and that would push prices higher.

“They’re going to have to watch very carefully,” former Fed chairman Ben Bernanke said last week of monetary policymakers.

“Clearly, they want to see inflation moving downward at a reasonable pace.”

People see gasoline and grocery prices rising every week, and that will affect where they think prices are going. “So, we don’t know how much time the Fed has,” Bernanke says.

The Fed will feel obliged to take more aggressive action if it doesn’t go down because continued inflation challenges their credibility.

St. Louis Fed chief James Bullard, who has been consistently hawkish, thinks the fed funds overnight rate needs to get to 3.5% by the end of the year, which could entail several aggressive rate hikes of a half-point—or more—from the current level of just under 1%.

The current Fed chairman, Jerome Powell, has ruled out a 75-basis-point hike, but Bullard thinks that cannot be off the table. In an interview on Fox News, Bullard commented:

“The more we can front load and the more we can get inflation and inflation expectations under control, the better off we will be. If the Fed can get expectations under control, it can then lower rates again in 2023 and 2024."

While recession fears are growing in financial markets, Bullard still thinks the Fed can engineer a soft landing and avoid a prolonged downturn.

He thinks the economy can “steam ahead,” driven by consumption, but there are numerous indications that consumers are pulling back in the face of relentless price increases.

Walmart (NYSE:WMT) and Target (NYSE:TGT) have taken hits to their profit and their stock prices have plunged, as they reported a buildup of inventories.

Home Depot (NYSE:HD) consumers are more resilient, however. The retailers find the surge in inflation unusual. The picture remains mixed as different income groups react differently.

Last week, Powell continued to be optimistic, however, saying there is “clear and convincing evidence” inflation is coming down. He thinks the labor market will be strong even though some consumers could experience pain from inflation and higher rates.

The Federal Open Market Committee plans to follow through on half-point hikes in June and July, boosting the policy rate to 1.75% and 2%. The Fed will remain flexible, Powell said last week, moving faster or slower on rates as needed.

Financial markets are waiting for the so-called Fed put—action by the Fed to lessen losses for stock market investors. But as Powell insists, the Fed will continue its action on rates until inflation is squashed, that hope is fading.

Stocks are very near a bear market, as the S&P 500 fell 19% by Friday, within a whisker of the 20% decline that defines a bear market. Analysts have lowered their threshold for Fed intervention in the index, which closed at 3,901.36 on Friday, from 3,700 to 3,529, a 26% decline from the closing high in January.

Some analysts are forecasting a decline to 3,000 by October in a prolonged bear market.

The personal consumption expenditures price index, usually referred to as the Fed’s preferred inflation indicator, is due out Friday. The core index for April is expected to fall to 4.9% on the year, from 5.2% in March. A worse-than-expected reading, as one analyst put it laconically, “could trigger a violent sell-off.”

Fed Watch: Bear Market Looms As Central Bank Seeks To Tame Inflation
 

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Fed Watch: Bear Market Looms As Central Bank Seeks To Tame Inflation

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Comments (4)
la popeye
la popeye May 23, 2022 2:01PM ET
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in order to get inflation.at shore 3 times 1percent is needed. just remember this.
André Uruguay
André Uruguay May 23, 2022 10:28AM ET
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Just to get facts straight: JPOW did NOT rule out 75 bps rate hike. He just said "it's nothing they're considering".  He has been emphasizing Fed will remain FLEXIBLE, and no number shall be taken as "a forecast" for the next hike.
Vidyasagar Deshpande
Vidyasagar Deshpande May 23, 2022 10:16AM ET
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Powell should be fired for his failure
la popeye
la popeye May 23, 2022 10:16AM ET
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short sight. This situation comes from well before him.2 %infl. and 5 % unempl. ..you remember ? ok, what was the move then ? when these 2were reached? NOTHING.!!why?because politician needed to borrow more money at cheap rate. period.
Murali Krishna
Murali Krishna May 23, 2022 7:18AM ET
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This long nothing is not required. Just write, Powell made a mistake and fool of himself and others. Everything including Ukraine situation, PutinOPEC, crude oil, gold are all because of Powell. Supply side problems are not real but created by oligopoly artists. Powell has to crash stocks and bonds and remove artificial wealth effect to destroy inflation, so much that even bill gates will think twice before buying something. Only when gold reaches $640 will Powell stop raising rates. Only when CrudAyil reaches $50-60 will Powell stop raising rates. Only when crypto currencies crash will Powell stop raising rates. Only when sp 500 hits 3200 or below will Powell stop raising rates, .... you want more???
Steven Angelo
Steven Angelo May 23, 2022 7:18AM ET
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Your analysis is seriously flawed with the exception that oil companies are clearly screwing the public.EVERY major oil co announced 200-300% increases in revenue and profits in Q1. They all justified this historical performance by saying they simply have to charge market prices even though production and distribution costs haven’t risen much.
 
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