The Federal Reserve will come one step closer to the end of its current cycle of interest rate hikes next week.
That offers cool consolation to borrowers, but it can steel economic optimists.
The central bank’s rate-setting committee meets on Tuesday and Wednesday, ending with the very likely announcement that it will raise its target rate by another half a percentage point. That would bring it up to 1.5 percent, a sharp rise from 0 percent in March.
This third 50 basis point hike in three months won’t move the markets much. What could be driving stock and bond prices is how well bankers are convincing markets that they will stand firm in their fight against inflation while addressing mounting fears of a recession.
The Fed always has a balancing act between its dual mandate of full employment and stable prices. Strong job growth has provided cover for the agency to act after generational inflation.
Central bankers are increasingly walking a fine line – dampening inflation with higher interest rates while touting the economy’s ability to withstand higher borrowing costs, and the Fed reducing its vast portfolio of US Treasuries and mortgage-backed bonds.
“Our economy needs to stand on its own two feet,” Raphael Bostic, President of the Federal Reserve Bank of Atlanta, told me last month. “We did all the things we did to make sure the economy didn’t collapse” in the first few weeks of the COVID-19 pandemic.
Now the Fed faces a different challenge — fighting inflation while making a compelling case that the economy can withstand that fight without retreating. So far, the economic data is on their side, even if the stock market is skeptical.
Company data is less clear. Target lowered its earnings guidance for the second time in three weeks. Snapchat warned in late May that the economy was “deteriorating further and faster than expected.” In early June, Microsoft cut its earnings forecast. They each pointed to different culprits for their profit warnings: too much inventory, a stronger dollar, a slowing economy.
Long-term investors know that the Fed must continue to fight inflation without crashing the economy.
tom hudson
Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami, where he is Vice President of News. He is a former co-host and editor-in-chief of the “Nightly Business Report” on public television. Follow him on Twitter @HudsonsView.
Comments are closed.