Aurelia Butler

(Reuters) -The Federal Reserve, fresh from its biggest interest rate hike in more than a quarter of a century, signaled on Friday that the rising risk of recession will not stop its battle to bring down searing inflation that’s punishing American households.”The Committee’s commitment to restoring price stability – which is necessary for sustaining a strong labor market – is unconditional,” the Fed said in its twice-yearly monetary policy report to Congress, referring to the U.S. central bank’s rate-setting Federal Open Market Committee. “We’re attacking inflation and we’re going to do all that we can to get it back down to a more normal level, which for us has got to be 2%,” Atlanta Fed President Raphael Bostic told American Public Media’s Marketplace radio program. “We’ll do whatever it takes to make that happen.” Three weeks ago, Bostic cautioned against overly rapid rate hikes and said the Fed may need to pause tightening in September to assess the economy. On Friday he said he supported this week’s hefty rate increase, and that policy needs to be “more muscular.” Inflation, measured by the Personal Consumption Expenditures Price Index, is running at more than three times the Fed’s 2% target. The central bank on Wednesday raised the range for its policy rate by 75 basis points to 1.50%-1.75% and published forecasts showing most policymakers support lifting borrowing costs further this year to perhaps 3.4%, and higher in 2023.Economists say such sharp increases could spark a recession. The report’s use of the word “unconditional,” and Bostic’s use of the “whatever it takes” phrase, suggest central bankers are willing to risk a downturn to avoid inflation getting out of control.”We are with the American people, and trying to make sure that the pain that is experienced, and the discomfort, is as short lived as possible,” Bostic said. Fed Chair Jerome Powell will update U.S. Congress members next week on the Fed’s plans to fight 40-year high inflation while pursuing maximum employment, its two sometimes conflicting jobs. Critics say the Fed has acted too late on inflation. Investors have been unnerved: On Wall Street, the benchmark S&P 500 index fell 5.79% this week, its biggest weekly drop since March 2020.Speaking in Barcelona on Friday, St. Louis Fed President James Bullard said he believes both the Fed and the European Central Bank “have considerable credibility, suggesting that a soft landing is feasible” on both continents.He said that differed from the 1980s when Fed’s fight against high inflation under former Fed Chair Paul Volcker triggered two recessions. “The Volcker disinflation was costly, but it was not credible initially – Volcker had to earn credibility,” said Bullard.’PRUDENT STRATEGY’Minneapolis Fed President Neel Kashkari, in an essay published on the regional bank’s website Friday, said he supported this week’s rate decision and could support another similar-sized hike in July. But he added the Fed should be “cautious”. “A prudent strategy might be, after the July meeting, to simply continue with 50-basis-point hikes until inflation is well on its way down to 2 percent,” Kashkari said. Powell this week said policymakers in July will likely choose between a rate hike of a half point hike or 75 basis points again.Traders in futures tied to the Fed’s policy rate are pricing in a year-end range of 3.5%- 3.75%, which equates to an average increase of 50 basis points at each of the year’s remaining four meetings.Many factors driving inflation are beyond the Fed’s control, such as gummed-up global supply chains and Russia’s invasion of Ukraine which has boosted food and energy prices. The U.S. labor market remains strong, with unemployment at 3.6%. Fed policymakers on Wednesday projected unemployment rising to 4.1% by 2024, as growth slows to 1.9% and inflation falls to 2.2%, a scenario Powell said would be hard to achieve but represents a “soft-ish” landing. On Friday the New York Fed published results from an economic model showing chances of a hard landing – defined as one quarter over the next 10 where GDP shrinks by at least 1% – are about 80%. For more on what a recession is, see.Kansas City Fed President Esther George, who dissented in this week’s policy decision, said on Friday she thought a bigger move added to policy uncertainty as the Fed was also beginning to shrink its massive balance sheet. Still, she said she shares the “strong commitment to bring down inflation to achieve our mandate for long-run price stability.” More

“That means that we’re going to have to be more muscular in our policies,” Bostic told American Public Media’s “Marketplace” radio program, adding that he hopes supply chain logjams will ease up in the summer. “We’re attacking inflation and we’re going to do all that we can to get it back down to a more normal level, which for us has got to be 2%. We’ll do whatever it takes to make that happen,” he said. More

Adeyemo told members of the Bank Policy Institute’s technology policy division that it was important for the federal government and financial institutions to work together to share information and stay ahead of “committed adversaries,” it said.He also underscored “Treasury’s commitment to sharing appropriate intelligence and fostering an ongoing, real-time dialogue with financial institutions about threats as they arise,” Treasury said in a statement.No details about the nature of the cyber threats were immediately available.Wednesday’s meeting was Treasury’s third with the group since the end of last year, a Treasury official said, adding that the financial sector was ahead of most other sectors in terms of collaboration with the government on cyber threats.Other Western powers have also seen a rise in cyber attacks on financial institutions since the war began.BaFin, Germany’s financial regulator, last month issued a fresh cyber security warning to the nation’s financial sector following a recent increase in cyber attacks.Russia’s invasion of Ukraine on Feb. 24, which Moscow calls a special military operation, has caused a serious deterioration in its relations with the West. Moscow denies Western accusations of involvement in cyber attacks. More

NEW YORK (Reuters) – Whipsawing bond yields, surging oil prices and a Federal Reserve bent on squashing the worst inflation in four decades are hampering investors’ ability to assess U.S. stock valuations, even as the market’s tumble creates potential bargains.Without a doubt, stocks are far cheaper than at the start of the year, following a 23% year-to-date decline in the S&P 500 that confirmed a bear market for the index earlier this week. Whether they are cheap enough, however, is less certain. Market volatility and a rapidly changing macroeconomic landscape have clouded metrics that investors typically use to value stocks, such as corporate earnings and Treasury yields, keeping some potential buyers on the sideline.”Until we see some better visibility on the rates outlook and some better visibility on the earnings outlook, the fair value for equities is a little bit elusive,” said Sameer Samana, senior global market strategist at Wells Fargo (NYSE:WFC) Investment Institute. The institute recently started recommending clients reduce equity risk and move funds into fixed income.Stocks came under more pressure this week, with the S&P 500 falling to its lowest since late 2020, in the wake of the Fed enacting its largest rate-hike in nearly three decades.This year’s decline lowered the index’s forward price-to-earnings ratio, which compares its price with its expected profits, to 17.3, from 21.7 at the start of 2022 – closer to the market’s historic average of 15.5, according to Refinitiv Datastream.But while S&P 500 earnings are expected to rise nearly 10% in 2022, according to Refinitiv IBES, some market participants doubt those estimates will hold up in the face of surging inflation and tightening financial conditions.Wells Fargo institute strategists forecast positive but slowing earnings growth this year and a contraction in 2023, as they expect a recession in late 2022 and early 2023.”We are advocating to investors to consider an economy and an earnings backdrop that may be more challenging … so just don’t be fooled by where valuations are based off of today’s expectations,” said Chad Morganlander, portfolio manager at Washington Crossing Advisors, who is recommending clients continue to underweight equities. Graphic: S&P 500 timeline – https://fingfx.thomsonreuters.com/gfx/mkt/gdpzygwenvw/Pasted%20image%201655478585336.png Morgan Stanley (NYSE:MS) analysts expect earnings to come in between 3-5% below consensus views, leading them to forecast that the S&P 500 is likely to see a “more reliable level of support” at 3,400, some 8% below Friday’s level, they wrote earlier this week.U.S. Treasury yields also play an important role in standard valuation models. Since U.S. debt is seen as a relatively risk-free investment, rising yields tend to dull the allure of stocks, as they weaken the value of future cash flows in standard models.Yet shifting expectations for how hawkish the Fed will need to be to fight inflation have made yields exceptionally volatile in recent weeks, making that calculus harder for investors. The benchmark 10-year Treasury yield has traded in a nearly 35 basis point range just this week, while the ICE (NYSE:ICE) BoFAML MOVE Index, which measures Treasury market volatility, stands at its highest level since March 2020.Broadly speaking, “the risk-free rate rising like it has is a headwind for equity indexes as well as individual equities,” Morganlander said.Some investors believe stocks have fallen low enough to start dipping in. Peter Essele, head of portfolio management for Commonwealth Financial Network, is advising clients to gradually begin buying stocks, projecting that an oversupply of home-furnishing and other consumer goods along with changing demand preferences will end up moderating prices.”I just think that equities have inflation wrong,” Essele said.Fed Chair Jerome Powell, who this week called inflation “much too high,” will give an updated view on the environment when he testifies next week before a U.S. Senate committee.Others remain hesitant.Robert Pavlik, senior portfolio manager at Dakota Wealth, believes an inflation fix may not be imminent. He has lower-than-typical equity exposure in portfolios he manages and is more heavily weighted to defensive stocks and those linked to inflation such as energy.”I want to be convinced that inflation is showing signs of slowing down,” Pavlik said. “Until then, I am waiting on the sidelines with extra cash.” More

NEW YORK (Reuters) – World stocks on Friday closed out their steepest weekly slide since the pandemic meltdown of March 2020, as investors worried that tighter monetary policy by inflation-fighting central banks could damage economic growth.The U.S. Federal Reserve’s biggest rate hike since 1994, the first such Swiss move in 15 years, a fifth rise in British rates since December and a move by the European Central Bank to bolster the indebted south all took turns roiling markets. The Bank of Japan was the only outlier in a week where money prices rose around the world, sticking on Friday with its strategy of pinning 10-year yields near zero.After sharp early losses, world stocks steadied somewhat to ending Friday’s session down by just 0.12%. The weekly slide of 5.8% was the steepest since the week of March 20, 2020. Wall Street’s Dow Jones Industrial Average slipped 0.13%, the S&P 500 added 0.22%, and the Nasdaq Composite jumped 1.43%.For the week, the S&P 500 dropped 5.8%, also its biggest fall since the third week of 2020.”Inflation, the war and lockdowns in China have derailed the global recovery,” economists at Bank of America (NYSE:BAC) said in a note to clients, adding they see a 40 percent chance of a recession in the United States next year as the Fed keeps raising rates.”We look for GDP growth to slow to almost zero, inflation to settle at around 3% and the Fed to hike rates above 4%.”The Fed on Friday said its commitment to fight inflation is “unconditional”. Fears that its rate hikes could trigger a recession supported Treasury prices and slowed the rise in yields, which fall when prices rise. Ten-year Treasury yields retreated to 3.22944% after hitting an 11-year high of 3.498% on Tuesday. [US/]Southern European bond yields dropped sharply after reports of more detail from ECB President Christine Lagarde on the central bank’s plans.”The more aggressive line by central banks adds to headwinds for both economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The risks of a recession are rising, while achieving a soft landing for the U.S. economy appears increasingly challenging.”In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell to a five-week low, dragged by selling in Australia. Japan’s Nikkei fell 1.8% and headed for a weekly drop of almost 7%.JAPANESE YEN DIVESBonds and currencies were jittery after a rollercoaster week. Overnight in Asia, the yen tanked after the Bank of Japan stuck to its ultra-accomodative policy stance. The yen fell 2.2% by late Friday, bolstering the U.S. dollar, which rose 0.73% against a basket of major currencies.Sterling fell 1% in New York as investors focused on the gap between U.S. and UK rates. The Bank of England is opting for a more moderate approach than the Fed.”If a central bank does not move aggressively, yields and risk price in more in the way of rate hikes down the road,” said NatWest Markets’ strategist John Briggs.”Markets may just be continuously adjusting to an outlook for higher global policy rates … as global central bank policy momentum is all one way.”Slower growth could dent fuel demand, so U.S. crude fell 6.42% to $110.04 per barrel and Brent was at $113.30, down 5.43% on the day. [O/R]Gold was off 0.8% at $1,841.13 an ounce, weighed down by a firmer dollar. [GOL/] More