Stock markets fall after Fed rally ends

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Such gloomy forecasts offer the possibility that the economy will end up contracting this quarter for the second time in a row – a common, albeit official, definition of a recession. The National Bureau of Economic Research, the nation’s semi-official arbiter of when business cycles begin and end, offers a more nuanced definition of a recession, calling it “a significant drop in economic activity that spreads throughout the economy and lasts for more than a few months”. .” Most economists agree that, by this definition, a recession has not yet begun.

Powell argued on Wednesday, as he has in the past, that the Fed can bring inflation down without causing a recession, though he acknowledged that its ability to do so depends on factors beyond his control. its control, such as gas prices, the pandemic and the war in Ukraine. Many analysts doubt that such a “soft landing” is realistic. After Mr Powell’s comments, economists at Deutsche Bank called those hopes “overly optimistic”.

However, even if the Fed succeeds, that does not guarantee a quick market recovery. Inflation is expected to decline only slowly. Fed officials themselves believe that it will remain high at least until the end of the year. However, the economy could slow quite quickly. Europe, which was experiencing slowing growth even before Russia invaded Ukraine and which has been hit even harder by soaring energy prices, is particularly vulnerable to such a period of “stagflation”. – a portmanteau of the words stagnation and inflation, used to describe periods of high unemployment and rising prices.

Analysts say the stock market is unlikely to regain its footing until there are clear signs that inflation is starting to get under control, which in turn would relieve the Fed from raising rates quickly. Stocks briefly rallied in late May, ending a seven-week losing streak as data appeared to show consumer price gains had peaked. But selling started again last week after a new Consumer Price Index report showed inflation accelerating again, jumping 8.6% in May from a year earlier. .

“Only when it is clear that the US has seen a spike in inflation should concerns about the path of Fed hikes ease significantly,” wrote Rabobank strategist Jane Foley, in an email. “Meanwhile, market sentiment should remain marked.”

The last time the Fed had to raise rates quickly to control inflation, in the late 1970s and early 1980s, it caused what was at the time the worst recession since the Great Depression. But economists are optimistic that the pain this time will not be as severe, partly because inflation has not yet become rampant.

Still, Bryson noted that recessions, once they start, often prove difficult to escape.

“Touch wood, you don’t need to go through the same depth of recession that we had in 1981, 1982 to eliminate inflation from the economy today,” he said. “The problem, however, is that the stress of an economic downturn often brings out imbalances that until then were largely undetected.”

Jason Karaian contributed report.

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