Investment Commentary – May 10, 2022
Year to Date Market Indices as of May 10, 2022
• Dow 32,129 (-11.59%)
• S&P 4,000 (-16.03%)
• NASDAQ 11,744 (-12.24%)
• Gold $1,839 (0.46%)
• OIL $61.65 (27.26%)
• Barclay Bond Aggregate (-10.81%)
• Fed Funds Rate 1.00
• Current Annual Inflation Rate 8.5%
Fed’s Waller promises to tackle inflation, says mistakes of the ’70s won’t be repeated
Fed Governor Christopher Waller pledged that the central bank won’t make the same mistakes on inflation as its 1970s predecessor.
“We know what happened for the Fed not taking the job seriously on inflation in the 1970s, and we ain’t gonna let that happen,” he said.
Federal Reserve Governor Christopher Waller pledged Tuesday that the rate-setting group wouldn’t make the same mistakes on inflation that it did in the 1970s.
Back then, he said during a panel chat with Minneapolis Fed President Neel Kashkari, the central bank talked tough on inflation but wilted every time tighter monetary policy caused an uptick in unemployment.
This time, Waller said he and his colleagues will follow through on its intentions to raise interest rates until inflation comes down to the Fed’s targeted level. The central bank has raised rates twice this year, including a half percentage point move last week.
Though he noted the central bank’s political independence, Biden said, “The Fed should do its job, and it will do its job. I’m convinced of that in my mind.”
While Waller drew the comparison to the Fed of the 1970s and early ’80s, which eventually defeated inflation with a series of massive interest rate hikes when Chairman Paul Volcker took over, he said he doesn’t think the current policymakers need to be as aggressive.
“They had zero credibility, so Volcker just basically said, ‘I’ve got to just do this shock and awe,’” Waller said. “We don’t have that problem right now. This is not a shock-and-awe Volcker moment.”
The Volcker moves took the Fed’s benchmark interest rate to close to 20% and sent the economy into recession. Waller said he had a conversation with the former chair before his death, and Volcker said, “If I had known what was going to happen, I never would have done it.”
Waller said he thinks the economy can withstand the path of rate hikes this time that will be much gentler than the Volcker era.
April’s consumer price index report expected to show inflation has already peaked
Investors are eyeing what could be a pivotal consumer price index report for April, anticipating that the data shows inflation has already reached its height.
Economists warn that prices could remain elevated. The issue is how fast inflation could decline when it comes to determining how the Federal Reserve will respond with interest rate hikes.
CPI is expected to rise 0.2% in April or 8.1% on an annualized basis. That’s compared with a 1.2% monthly increase or 8.5% gain year-over-year in March.
April’s consumer price index report is expected to show inflation has already reached a peak — a development that some investors say could temporarily soothe markets.
But economists say, even with a reprieve in headline inflation, core inflation could gain on a monthly basis and stay elevated for months to come. Core inflation excludes food and energy costs.
The CPI report is expected to show headline inflation rose 0.2% in April, or 8.1% year-over-year, according to Dow Jones. That compares with a whopping 1.2% increase in March, or an 8.5% gain year-over-year. The April data is expected at 8:30 a.m. ET Wednesday.
Core CPI is expected to rise 0.4% or 6% year-over-year. That compares with 0.3% in March, or 6.5% on an annualized basis.
A potential turning point for stocks
In the stock market, some investors say the data could signal a turning point if April’s inflation comes in as expected or is even weaker .
“I think the market, from a technical standpoint, is very focused on trying to divine how much the Fed is going to move,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.
A hotter report would be a negative since it could mean the Fed will take an even tougher stance on interest rates. Last week, Fed Chairman Jerome Powell signaled the central bank could hike rates by 50 basis points, or a half percent, at each of the next couple of meetings.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.
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