In fact, the odds of a rise of three-quarters of a percentage point rose on Wednesday, though still somewhat off, after the May CPI report.
“The Fed needs to show resolve,” said Todd Lowenstein. “They can’t seem to be unconvinced about this stubborn and persistent inflation. The next two meetings should be half-point hikes.” Chief Equity Strategist for the Private Bank of Union Bank.
But Lowenstein acknowledged that there is a growing debate about whether the Fed should slow the pace of rate hikes, or even pause for a meeting, later this year to assess the impact of higher rates on the broader economy. There is a gap between when higher rates are announced and when they actually slow down consumer spending.
However, not everyone believes that the Federal Reserve has to be this bold. The Fed has begun a process called quantitative tightening, which can slow consumer demand by pushing up long-term interest rates.
Here’s how it works: As part of the Fed’s 2020 stimulus effort, the central bank bought massive amounts of bonds and mortgage-backed securities. This so-called quantitative easing pushed the Federal Reserve’s balance sheet to an impractical size of nearly $9 trillion.
“Quantitative tightening is definitely going to push long-term interest rates higher, and I don’t think the market is taking that into account. Investors might expect an overly hawkish Fed,” said Sandy Villier III, portfolio manager at St. Denis J. Villere & Co “The market has overreacted and this gives us opportunities to buy some things.”
Feller said that bonds and some US small-cap companies look attractive. But he acknowledged the need for caution on investors. There is no guarantee that the Fed can slow the economy without causing a recession.
“We will see if the Fed can do this magic trick and get a soft landing instead of a sudden one. There is no doubt that the Fed has waited a long time to respond to inflation,” Feiler said.
“We were hoping we’d have hit peak inflation,” said Jay Woods, chief market strategist at DriveWealth. “But the Federal Reserve does not control oil and gas prices. Consumer spending habits will change drastically.”
Canary technology in the coal mine?
Both companies have significant exposure to US companies. Oracle is a leader in CRM and database software while armies of business graphics designers use Adobe’s creative tools (PhotoShop, Acrobat, InDesign to name a few).
Shares of Oracle and Adobe, like the rest of the tech companies, have fallen this year. Oracle’s stock is down nearly 25% while Adobe’s stock is down more than 30%.
Monday: Oracle earnings
Tuesday: US producer prices
Wednesday: US retail sales. Federal Reserve Policy Announcement
Friday: US Industrial Production
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