Members of the Federal Reserve, the central bank tasked with deflating inflation from 8.3% to its goal of around 2%, are now raising interest rates in an attempt to cool the economy.
“These are uncharted waters for all of us,” said Liz Young, head of investment strategy at SoFi. “Inflation has not been this high since the year I was born.” The economy will recover, she said, but it’s going to be a “slow burn.” Markets will continue to tumble, and prices will remain elevated for a while, she added: “I think we might have to stay there for a little while. I do not know that we’re going to bounce back out of it very quickly . “
Part of the lack of confidence stems from the increase in broad and fast social media and communications outlets –— and has nothing to do with what’s going on at the central bank, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. A continuous real-time feed of news and analysts makes it easier to judge the Fed’s actions and not their outcomes.
“You know them so much better now,” Silverblatt said. “You see all of the nooks and crannies.”
Timing is everything: Inflation rates do not always come down. Just look at the 1970s when the US economy suffered three recessions during which the underlying inflation problem never went away.
“Stagflation is probably the worst word of vocabulary for financial markets because it’s the worst of both worlds. Inflation stays high and the economy slows,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. “I think we’re getting a whiff of stagflation now.”
But the ghost of the 1970s lingers on in all Fed governors’ minds, and they’ve said they’ll ratchet up their hawkishness – no matter what it means for markets and the economy.
Grohowski says he sees inflation sticking for the remainder of this year and some of next, but that it is not yet entrenched in the economy and will come down by 2023.
Still, sentiment is not the same for investors and consumers. Among economists and analysts, Grohowski said, “there’s the expectation that there will be some relief and that we’re most likely right now living through peak inflation.” But consumers are “worried that today’s inflation rates are going to continue for longer.
They may not be wrong. While prices for certain goods will fall quickly, energy and housing prices will likely remain high for some time, according to the Fed.
We do not think inflation is entrenched, “said Grohowski.” But we admit that there is concern, because parts of inflation are stickier than most economists and even the Fed expected. “
Davos is back and the world has changed
The World Economic Forum – which famously combines high-minded panels with flashy parties – is back in person in Davos, Switzerland, for the first time in two years. The conference aims to bring important people together to tackle pressing issues like inequality, climate change, the future of technology and geopolitical conflict. But the logic behind inviting some of the wealthiest people on Earth to solve these problems from a resort town looks even shakier these days.
The event takes place against the backdrop of the worst cost-of-living crisis in decades in both developed and many developing economies. Soaring food and fuel prices are already causing hunger and hardship, fanning instability, triggering protests and emboldening political insurgents.
The main event is likely to be a speech on Monday by Ukrainian President Volodymyr Zelensky, who is expected to participate via video conference. German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen are also scheduled to deliver addresses later in the week, which will be scrutinized as EU countries struggle to agree on a formal oil embargo against Russia.
Monday: Federal Reserve Bank of Kansas City President Esther George speaks; Earnings from Zoom Video Communications,
Tuesday: April new home sales; Earnings from Intuit, AutoZone, Best Buy, Toll Brothers, Petco and Nordstrom
Wednesday: April core durable goods orders, FOMC minutes, weekly crude oil inventories; Earnings from NVIDIA Corporation, Williams-Sonoma and Dick’s Sporting Goods
Thursday: Q1 GDP (Second Estimate), Initial jobless claims, April pending home sales; Earnings from Alibaba, Costco, Dollar General and Dollar Tree
Friday: Federal Reserve Bank of St. Louis President and FOMC voting member James Bullard speaks