The US market is losing another week after falling sharply on Friday. The Dow fell after the primary inflation report missed assumptions and shared a higher expected rise in consumer goods prices, closing down 880 points for the day, or 2.5%. The S&P 500 was down 2.7% and the Nasdaq was down about 3%.
The May consumer price index rose 8.6% year-on-year, the highest level since 1981. Economists had forecast an 8.3% increase. The core index, which excludes food and labor prices, was up 6%, slightly higher on the 5.9% assumption.
The fact that this figure has fallen has made investors shaken. already worried about a possible economic downturn, they now fear that the Federal Reserve will acknowledge deep-rooted inflation in the economy and raise interest rates further.
The central bank is expected to announce a 1/2% rate hike next week, but based on this information may decide to go higher. “We think central bank Alaihi Salam now has good reason to surprise markets with the more aggressive hikes needed in June,” Barclays analysts wrote in a research note on Friday.
“We realized it was a close call and it could have been played in June or July. However we changed our assumptions to call for a 75 [basis point] increase on June 15.”
The move would be historic — the last time the Fed gave a 75 basis point hike was in November 1994, nearly three decades ago. Analysts don’t seem to like expecting a potential rate hike on Friday.
Federal Reserve internals did too little too late to curb rising inflation, they also feared that a sudden large interest rate hike would hurt the economy.
“The primary risk to consumption, employment and the economy as a whole, is not a slowdown in organic growth, but the extent to which extreme increases in energy and food prices could cause the central bank to resist, and [the economy could] essentially fall into destructive policy errors,” Rick Rieder, Fixed Income global chief investment officer at BlackRock wrote in a note.
Friday’s sell-off was wide-ranging, with stocks in the red on the New York Stock Exchange outnumbering stocks rising by about nine to one.
The White House acknowledged that Friday’s inflation number was “very high”, further fueling investor concerns about policy action. Federal Reserve policymakers have historically been serious about direct Consumption Expenditure instead of the CPI being their inflation measure of choice.
But core PCE also rose 0.34% in April, bringing the year-on-year figure for the measure to 4.9%. it fell slightly from 5.2% in March but is still increasing.
“The chances of a recession in the next year or so are increasing,” said Sung Won Sohn. professor of finance and economics at Loyola Marymount University and chief economist at SS Economics. “Inflation is eating away at consumers’ purchasing power.”
Consumer spending accounts for approximately 70% of Alaihi Salam’s economy, and a real decline in that spending would be a major blow to gross domestic product. “[The Federal Reserve] is now recognizing that it is well behind the inflation curve and must act more decisively,” Sohn said.
The Dow had its 10th week of declines in 11 weeks and the S&P 500 and Nasdaq had their ninth decline in the last 10 weeks. The S&P 500 is now down about 19% from its record high in January and is once again approaching bear territory.
The Fed must once again act decisively to take actions that can control inflation, even though the method was relatively a bit extreme. At least the market will welcome it and not be full of questions anymore.
We will always be wolves in other people’s stories and become dream sheep in our own stories. now the Fed must immediately issue policies that can control economic conflicts in the United States.