June 26, 2022

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Larry Summers: More rate increases ahead to contain inflation

Another big Fed rate hike is coming. But how many after that?

There will likely be more price increases In the coming months because Jerome Powell and the rest of the Fed cannot declare victory against him rampant inflation anytime soon, especially since consumer prices are up 8.6% year over year through May.

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.

A pause certainly looks less likely after the hot May inflation report. In fact, Dealers are now pricing in More than 40% chance of raising three-quarters of a point at the Federal Reserve’s July meeting. Barclays economists wrote on Friday that a “call close” on whether the Federal Reserve raised interest rates too much in June or July.

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.

Now, the Federal Reserve Decode some of these assets By letting the bonds on their balance sheet mature and not reinvesting the capital payments in those bonds. This should, in theory, lead to higher long-term returns. This may be another reason why fears of massive rate hikes by the Federal Reserve have been exaggerated.

“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.”

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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.

Others worry that large interest rate increases by the Fed will not help bring down inflation, especially since a large part of the higher rates are due to higher energy costs. Unless the Fed can somehow broker a peace deal between Russia and Ukraine, we’d be fortunate to see anything Pump comfort anytime soon.

“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?

technology stock tough year. The Nasdaq In a bear market as investors fear the impact of higher interest rates on Silicon Valley Profits.
Are the concerns justified? Investors will get a better idea after two giant software companies – inspiration (ORCL) And the Adobe (ADBE) This week’s earnings report.

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%.

Investors will be paying close attention to what each company has to say about the expectations of companies spending on technology for the next few months and beyond. They can give Wall Street more clues about how other cloud software giants, such as Microsoft (MSFT)And the The Google (The Google)And the succulents (succulents) And the Amazon (AMZN)they do.
Another cloud leader, dao component sales force (CR)Strong earnings have been reported recently. But the company cut her gaze She also said she plans to be more “calculated” about hiring in the future.

next one

Monday: Oracle earnings

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Tuesday: US producer prices

Wednesday: US retail sales. Federal Reserve Policy Announcement

Thursday: US housing starts and building permits begin. US weekly unemployment claims; earnings from Kroger (K)And the Jbeil (JBL) and Adobe

Friday: US Industrial Production