Stocks pre-market: Jerome Powell heads to ‘danger zone’

“We feel the economy is very strong and will be able to withstand tighter monetary policy,” Powell said in March.

Slower growth and higher unemployment “are painful for the public we serve, but they are not as painful as having to restore price stability and have to go back again,” Powell said.

Breaking: The central bank was not as tough as some investors thought. Some were bracing for the Fed’s first full-point hike in modern history. However, there were signs that the central bank intends to remain tight-lipped on its outlook, even if it means pushing the economy into rocky territory.

“The Fed has now entered the ‘danger zone’ in terms of rate shocks affecting the US economy,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The Fed’s main interest rate is now set between 3% and 3.25%. Earlier, its top officials indicated that rates could rise to 3.4% by the end of this year, which would mean that the hiking cycle was almost over.

not anymore The Fed is setting rates at 4.4% by the end of the year, which means more big hikes in the coming months.

At the same time, the Fed has revised its expectations for unemployment higher. Currently, it predicts that the unemployment rate will reach 4.4% in 2023, it was 3.9% in June.

What it means: The Fed won’t back down, even if its strong medicine is hard for the American economy to swallow.

“In our view, the Fed funds rate of 4% is the highest the economy can bear, and the Fed is clearly threatening to raise rates above that level,” Mark Haefele, chief investment officer at UBS Global Wealth Management. , he told customers after the announcement.

It’s a message that could weigh on markets in the coming weeks as Wall Street digests it.

US stocks alternated between gains and losses on Wednesday before ending the day lower. The S&P 500 ended down 1.7%. The US dollar, on the other hand, continues to advance.

Paul Donovan, chief economist at UBS Global Wealth Management, told me volatility is likely to persist because investors aren’t sure how the Fed is measuring its success. Additionally, many of the factors driving inflation numbers — such as the war and drought conditions in Ukraine — are beyond the central bank’s control.

“What will add to the uncertainty in the market is that the Fed is not saying what it is trying to do,” Donovan said. But that is acknowledging that it might hurt.

Japan intervenes to prop up the yen for the first time in 24 years

Japan tried to shore up the value of its currency on Thursday by buying the yen for the first time in 24 years to prevent it from further weakening against the US dollar.

“The government is concerned about these excessive fluctuations and has just taken decisive measures,” Japan’s Vice Finance Minister for International Affairs Masato Kanda told reporters on Thursday after the rare move.

Asked by a reporter if “decisive action” meant “market intervention,” Kanda said yes.

Important context: Thursday’s decision marks the first time since 1998 that the Japanese government has intervened in the foreign exchange market by buying the yen.

Earlier on Thursday, the Bank of Japan announced it would maintain its ultra-loose monetary policy, signaling its determination to stay out of the G7 nation’s scramble to raise interest rates to tame inflation.

Why it matters: The action underscores the global implications of Fed policy and the US dollar’s dramatic rally, which is pushing other currencies lower. This makes it more expensive for other countries to import food and fuel, and domestic prices rise. (More on that below.)

Inflation in Japan has risen above the Bank of Japan’s target, hitting its fastest annual pace in eight years.

The costs of high inflation are increasing

Central banks are saying they will do whatever it takes to get inflation under control. Meanwhile, leaders and policymakers are warning that failure is not an option.

International Monetary Fund chief Kristalina Georgieva told CNN’s Christiane Amanpour on Wednesday that there will be “people on the streets” around the world if action is not taken to protect those most vulnerable to the effects of rising prices.

“If we don’t lower inflation, it will hurt those who are most affected, because an explosion in food and energy prices for the well-off is an inconvenience, for poor people, a tragedy,” said Georgieva. “So we think of poor people first when we advocate attacking inflation with force.”

Central banks “have no choice” but to raise interest rates in an effort to fight inflation, he added.

“The critical question before us is to restore the conditions for growth, and price stability is a critical condition,” said Georgieva.

The big picture: Georgieva’s comments are a reminder of the real-world consequences of the decisions being made right now. But a rapid rise in interest rates could also cause global damage.

“With central banks around the world simultaneously raising interest rates in response to inflation, the world may be headed for a global recession in 2023, with a series of financial crises that would cause lasting damage to emerging market and developing economies.” he said in a recent report.

the next

Darden restaurants (DRI) Reports results before US markets open. Costco (COST) and FedEx (FDX) continue after closing.

Also today: Last week’s initial US jobless claims are due at 8:30 am.

Coming tomorrow: A first look at the latest Purchasing Managers’ Index from the top economies will provide clues as to how they’re holding up.