Good luck with that.
Smith said he thinks the Fed could raise interest rates by half a point twice this year.
“Inflation doesn’t go down by itself,” Smith said. “You have to knock it out. It doesn’t die of natural causes.”
Powell said in a speech earlier this month that he hoped the Fed could make a “soft” fall by raising interest rates, meaning he did not want higher rates to trigger a sharp slowdown in growth – or a recession.
But history shows that that can be difficult.
“You can still get a soft punch in the face,” Smith said. “It’s not going to be fun or interesting.” “The way to break inflation, for better or worse, is to cause a recession. Hopefully that will be a mild recession.”
Higher interest rates may not only cause an economic downturn. It will likely lead to a dip in earnings growth as well. This could be a bad thing for investors who are accustomed to (some would say spoiled) interest rates at zero.
“What has been holding the stock market for the past few years is monetary stimulus. It has stopped completely,” said Mark Yusko, chief executive officer and chief investment officer at Morgan Creek Capital Management.
With all this in mind, there are growing concerns about stagflation – a combination of stagnant growth and rising inflation.
Some worry that the Fed can do little to stop the inflation part of the equation by raising interest rates, particularly because oil and other commodity prices are rising due to Russia’s invasion of Ukraine and the continuing supply chain disruptions from the pandemic.
said Wayne Wicker, chief investment officer at MissionSquare Retirement.
But others hope the Fed can tackle the delicate tightrope and start slowing inflation pressures without crushing consumer demand.
“What the Fed does is best for the economy,” said Andrew Heisinger, founder and CEO of Quant Data.
“It could take a year for the rate hike to affect the market,” he added. “If the Fed is not very aggressive, there may be a positive reaction to higher interest rates.” “If there is no shock and awe from the Federal Reserve, the economy can enjoy sustainable growth.”
The labor market is still a bright spot for the economy
Investors and economists want to see a similar story when the government releases March jobs numbers on Friday.
Wall Street expects payroll growth to slow slightly, with the workforce expected to increase by 488,000 jobs. The unemployment rate is expected to fall to 3.7%.
As long as the labor market remains strong, experts argue that the economy should continue to post steady growth, even while the Federal Reserve raises rates.
“For there to be stagflation, the economy needs to stagnate. At the moment, there is little evidence of that,” Linda Dussel, chief equity analyst at Federated Hermes, said in a recent report.
Friday: US jobs report. American manufacturing ISM
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