As stocks fall, economic fears rise, alongside inflation

But in April, Fed officials began to change their minds, expressed in speeches and other public comments, about how quickly interest rates will need to rise to bring inflation under control, and economic projections of Wall Street have also changed. In the futures market, where traders are betting on possible interest rate hikes, the prevailing view is now that the Fed’s benchmark rate will climb to around 2% by July, which seemed unimaginable there. one more month.

For that to happen, the central bank would have to raise its key rate by half a percentage point at each of its next three meetings, and the fear is that such aggressive increases could trigger an economic crisis, rather than simply chill things enough to slow inflation but keep the economy growing.

“Every time the Fed has spoken, the markets have taken it quite negatively,” said Saira Malik, chief investment officer at Nuveen, a global investment manager. “Investors fear that with these multiple rate hikes, the Fed will cause a recession rather than a soft landing.”

Rising interest rates will affect consumer demand. Mortgage rates, for example, have already jumped to more than 5%, from 3.2% at the start of the year, swallowing up the budget of new home buyers. Other borrowing costs, ranging from consumer loans to corporate debt, will rise as the Fed raises its benchmark rate.

For now, many companies — from United Airlines to PepsiCo — are passing on rising costs and reporting that sales continue to rise.

Economists wonder how long this will last.

“There’s going to be a natural slowdown in spending, maybe before interest rates rise, as costs go up,” said Jean Boivin, director of the BlackRock Investment Institute. “The central bank will have to watch that very carefully because if that happens naturally and then you add interest rate increases, that’s how you get to a recessionary scenario.”

Broadly speaking, this week’s earnings reports showed that earnings growth continues. About 80% of S&P 500 companies that reported results through Thursday did better than expected, according to FactSet data.

But other companies have only added to the downdraft. Netflix plunged after saying last week that it expected to lose subscribers – 200,000 in the first three months of the year and another two million in the current quarter. The stock is down more than 46% for the month.

On Friday, Amazon fell 12% a day after the e-commerce giant reported its first quarterly loss since 2015, citing rising fuel and labor costs and warning that sales would slow. Its shares are down 22% this month.

General Electric warned on Tuesday that the economic fallout from Russia’s invasion of Ukraine would weigh on its bottom line. Its shares fell 10% that day and are down about 16% for the month.

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