Pre-market stocks: Jerome Powell heading into the ‘danger zone’

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When the Federal Reserve began raising interest rates to combat decades-high inflation, Chairman Jerome Powell pointed out that the central bank could raise borrowing costs without inflicting too much damage on the economy.

“We believe the economy is very strong and will be able to withstand tighter monetary policy,” Powell said in March.

Six months later, Powell seems less assured. The Fed announced its third consecutive oversized interest rate hike on Wednesday and signaled it would continue to be aggressive if inflation remained elevated.

Slower growth and higher unemployment “are all painful for the public we serve, but they’re not nearly as painful as not restoring price stability and having to come back and start again later,” Powell said.

Breakdown: The central bank didn’t go as far as some investors thought. Some had braced for the first full point hike in modern Fed history. Yet hidden in the central bank’s projections were signs that it planned to stay firm, even if that meant pushing the economy into difficult territory.

“The Fed has now entered the ‘danger zone’ in terms of the rate shock it is launching on the US economy,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The Fed’s main interest rate is now set between 3% and 3.25%. Earlier, its top policymakers had indicated that rates could climb to 3.4% by the end of this year, which would mean the hike cycle was almost over.

Not anymore. The Fed now forecasts rates of 4.4% by the end of the year, implying further significant hikes in the coming months.

At the same time, the Fed revised its unemployment expectations upwards. He currently expects the jobless rate to hit 4.4% in 2023, down from an estimate of 3.9% in June.

What it means: The Fed is not going to back down, even if its strong medicine is hard for the US economy to swallow.

“Our view is that a 4% fed funds rate is about the highest the economy could sustain, and the Fed is clearly threatening to raise rates above that level,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management. , told customers after the announcement.

It’s a message that could rock markets in the coming weeks as Wall Street digests it.

US stocks alternated between gains and losses on Wednesday before ending the day lower. The S&P 500 ended down 1.7%. The US dollar, meanwhile, continues to rise.

Paul Donovan, chief economist at UBS Global Wealth Management, told me volatility is likely to persist because investors are unsure how the Fed measures its success. Additionally, many of the factors driving up inflation numbers — such as the war in Ukraine and drought conditions — are beyond the central bank’s control.

“What’s going to add to market uncertainty is the Fed not saying what it’s trying to do,” Donovan said. But he is recognize that it can hurt.

Japan tried to support the value of its currency on Thursday for the first time in 24 years by buying the yen to prevent it from weakening further against the US dollar.

“The government is concerned about these excessive fluctuations and has just taken decisive action,” Masato Kanda, Japan’s vice finance minister for international affairs, told reporters on Thursday after the rare decision.

When asked by a reporter if “decisive action” meant “market intervention”, Kanda replied in the affirmative.

Important context: Thursday’s decision marks the first time since 1998 that the Japanese government has intervened in the foreign exchange market by buying yen.

Earlier on Thursday, the Bank of Japan announced that it would maintain its ultra-loose monetary policy, signaling its determination to remain an exception among G7 countries struggling to raise interest rates to control inflation. .

Why it matters: The stock underscores the global effects of Fed policy and the staggering rally in the US Dollar, which is pushing other currencies lower. This makes it more expensive for other countries to import food and fuel, and fuels domestic price hikes. (More on that below.)

Inflation in Japan exceeded the Bank of Japan’s target, hitting its fastest annual pace in eight years.

Central banks are hammering home that they will do whatever it takes to bring inflation under control. In the meantime, leaders and decision makers are warning that failure is not an option.

Kristalina Georgieva, the head of the International Monetary Fund, told CNN’s Christiane Amanpour on Wednesday that there will be ‘people on the streets’ around the world unless steps are taken to protect those most at risk from the consequences. of the price increase.

“If we don’t reduce inflation, it will hurt the most vulnerable, because a spike in food and energy prices for the better-off is an inconvenience – for the poor, a tragedy,” Georgieva said. “So we think of the poor first when we argue for a forceful attack on inflation.”

Central banks have “no choice” but to raise interest rates to fight inflation, she added.

“The crucial question before us is to restore the conditions for growth, and price stability is a critical condition,” Georgieva said.

Big Picture: Georgieva’s comments serve as a reminder of the real-life consequences of decisions that policymakers are currently weighing. But the rapid rise in interest rates could also cause damage on a global scale.

“As central banks around the world simultaneously raise interest rates in response to inflation, the world could be heading for a global recession in 2023 and a series of financial crises in emerging markets and developing economies that will would cause them lasting harm,” the World Bank said. said in a recent report.

Darden Restaurants (DRI) publishes its results before the opening of the American markets. Costco (COST) and FedEx (FDX) follow after the close.

Also today: Initial US unemployment claims for the past week arrive at 8:30 a.m. ET.

Coming tomorrow: A first look at the latest PMIs for major economies will provide clues as to how they are holding up.


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