The Federal Reserve’s latest rate hike is expected to keep markets on edge in the holiday-shortened week ahead. Wall Street will be closed on Monday, with markets observing Juneteenth for the first time.
Last week, the S&P 500 logged its worst weekly performance since March 2020, losing 5.8% after falling into a bear market on Monday. This decline also marked the benchmark index’s 10th loss in the last 11 weeks.
The U.S. central bank on Wednesday raised its benchmark interest rate by 75 basis points, the largest increase in nearly three decades. Fed Chair Jerome Powell also hinted at more aggressive tightening ahead as policymakers ratchet up their fight against inflation.
On Wall Street, the move spurred a wave of recession calls and sent markets into disarray.
The Dow Jones Industrial Average was down nearly 5% for the week, briefly slipping below the 30,000 level. The Nasdaq pared some losses to close higher Friday but still rounded the week out in the red, down roughly 1.7%. On Saturday, the price of bitcoin (BTC-USD) dropped below $18,000 for the first time since 2020 as risk assets continue to face pressure.
“The main take-away for investors is that inflation has the Fed’s attention and that they are taking it very seriously,” Independent Advisor Alliance Chief Investment Officer Chris Zaccarelli said. “Despite the fact that higher interest rates – all things being equal – are bad for risk assets, it is more important to get inflation under control and the rapid (and flexible) change from 0.5% up to 0.75% on very short notice, showed a new willingness to fight inflation with actions rather than words.”
While the Fed’s unprecedented action Wednesday reiterated its commitment to normalizing price levels, investors and economists fear this also increased the risk its inflation-fighting measures may tip the economy into a recession.
“Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up,” analysts at Bank of America said in a note Friday. The firm slashed its GDP growth forecast to almost zero and sees a 40% chance of a recession next year.
“In the spring of 2021 we argued that the biggest risk to the US economy was a boom-bust scenario,” the bank’s research team noted. “Over time the boom-bust scenario has become our baseline forecast.”
Meanwhile, at JPMorgan, analysts warned the S&P 500’s decline implies an 85% chance of recession.
All eyes will remain Powell in the coming week, with the Fed chair set to testify before the U.S. Senate Banking Committee Wednesday morning.
The Fed chief has remained adamant that the U.S. economy can avoid an economic slowdown, even as market participants lose confidence at the prospect of a “soft landing” – a period when economic growth is slowed just enough to quell inflation but without spurring economic downturn.
“We’re not trying to induce a recession now, let’s be clear about that,” Powell told reporters Wednesday. In remarks at a conference in Washington on Friday, Powell also doubled down on the central bank’s goal to rein in soaring price levels.
“My colleagues and I are acutely focused on returning inflation to our 2% objective,” he said. “The Federal Reserve’s strong commitment to our price-stability mandate contributes to the widespread confidence in the dollar as a store of value.”
Powell’s optimism does not appear to be shared by Wall Street or business leaders.
A survey released by the Conference Board found that 60% of chief executive officers and other C-suite leaders across the globe believe their geographic region will enter a recession by the end of 2023. Some 15% of CEOs say they believe their region has already entered recession.
Models from Bloomberg Economics suggest the risk of a recession has soared to more than 70%.
Another key sentiment gauge is set for release in the week ahead. The University of Michigan is scheduled to publish the final read on its sentiment index for June; the survey’s initial reading for June fell to the lowest on record as inflation weighs on consumers.
Corporate earnings will be light during the week, with Lennar Corporation (LEN), Rite Aid Corporation (RAD), and FedEx Corporation (FDX) set to report quarterly results.
