Finance

AFTER A FRANTIC sell-off in the first half of the year, investors are taking a breather. The S&P 500 index of American stocks, for instance, is back around the level it was at the start of June. Yet with a little less than five months of 2022 remaining, it would take a turnaround of astonishing proportions to avoid a torrid year in financial markets. The period’s distinguishing characteristics are already clear: the slump has been unusually deep and unusually broad. If the year ended now, an investor in the MSCI All Country World Index of global stocks would have lost 15%, the lowest return since 2008. The broad-based decline across asset classes has added another element of pain, too. Most obviously, both stocks and bonds have been hammered. The good news is that distress has been concentrated among a few types of assets and firms. Whether that silver lining remains come the end of the year is uncertain. Such a coincident fall in stocks and bonds is rare. When stock prices fall because of a weakening economy, bond prices usually rise owing to expectations of interest-rate cuts, bolstering a mixed portfolio. Conversely, stocks often benefit from a stronger economy, while bonds sell off. The double dip this time is driven by surging inflation, expected interest-rate rises and a belief that the economic situation will deteriorate. An investment in the FTSE Global World Government Bond Index would have lost 13% so far in 2022, making this the first year since 1986, when the index was established, in which there have been double-digit falls in both stocks and bonds globally.Moreover, equity markets have been battered almost everywhere. Stocks in Europe, Japan and emerging markets are all down. As a result, there are precious few winners. The Bloomberg Commodity Index, comprising energy, agricultural and industrial commodities, is up by 18% since January. Oil and gas companies have been bolstered by Russia’s invasion of Ukraine, and the massive disruption to oil and gas supplies that followed. MSCI stock indexes for oil exporters like the United Arab Emirates, Saudi Arabia and Kuwait are up, as are those for Brazil and Indonesia, which produce other commodities. The MSCI Chile index is up by more than 20%, but with a market capitalisation of less than $40bn that is not much consolation to investors. If you were presented with this degree of misery 20 years ago, you might have expected the odd mainstream financial firm to start looking wobbly. Perhaps the most unusual thing of all is how serious distress so far has been largely confined to two groups—both outside mainstream Western finance. The first is Chinese property developers; sales of which have cratered this year, driven by concerns about the financial health of the companies and the economic impact of protracted covid-19 lockdowns. A bond maturing in January 2024 issued by Country Garden, a developer which until recently held an investment-grade credit rating, now offers a yield of more than 100%, up from 5% this time last year. But China’s strict capital controls mean that the turmoil has produced few reverberations outside the country so far. The second place where distress has emerged is the world of cryptocurrency and decentralised finance. Celsius, Terra and Three Arrows Capital, respectively a crypto-oriented lender, a stablecoin and a crypto-oriented hedge fund, have all gone to the wall. The big question for the rest of the year is whether the pockets of distress will continue to be isolated. Already the strain in emerging markets, which are confronted with rising global interest rates, as well as elevated food and energy prices, is becoming clear. As of late July, around 36% of issuers on the JPMorgan Chase Emerging Market Bond Index had yields above 10%, a figure which peaked at only 29% during the market panic in March 2020. Fortunately for the West, its mainstream financial institutions have become less exposed to emerging markets over time. Another source of angst could be the euro zone if the energy crisis intensifies over the winter: something the European Central Bank tried to guard against in July by creating a new mechanism to curb bond-market jitters. And as it has grown harder and more expensive to issue corporate bonds, indebted firms everywhere could face a building funding crunch. One of the more unusual years in finance over the past few decades is not over yet. ■ More

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The market has seen tremendous price swings this year – whether it comes to equities, fixed income, currencies, or commodities — but volatility expert Paul Britton doesn’t think it ends there. 

Britton is the founder and CEO of the $9.5 billion derivatives firm, Capstone Investment Advisors. He sat down with CNBC’s Leslie Picker to explain why he thinks investors should expect an uptick in the amount of concerning headlines, contagion worries, and volatility in the second half of the year. 
(The below has been edited for length and clarity. See above for full video.)
Leslie Picker: Let’s start out — if you could just give us a read on how all of this market volatility is factoring into the real economy. Because it seems like there is somewhat of a difference right now.
Paul Britton: I think you’re absolutely right. I think the first half of this year has really been a story of the market trying to reprice growth and understand what it means to have a 3.25, 3.5 handle on the Fed funds rate. So really, it’s been a math exercise of the market determining what it’s willing to pay for and a future cash flow position once you input a 3.5 handle when to stock valuations. So, it’s been kind of a story, what we say is of two halves. The first half has been the market determining the multiples. And it hasn’t really been an enormous amount of panic or fear within the market, obviously, outside of the events that we see in Ukraine. 
Picker: There really hasn’t been this kind of cataclysmic fallout this year, so far. Do you expect to see one as the Fed continues to raise interest rates?

Britton: If we’d had this interview at the beginning of the year, remember, when we last spoke? If you’d said to me, “Well, Paul, where would you predict the volatility markets to be based upon the broader base markets being down 15%, 17%, as much as 20%-25%?’ I would have given you a much higher level as to where they currently stand right now. So, I think that’s an interesting dynamic that’s occurred. And there’s a whole variety of reasons which are way too boring to go into great detail. But ultimately, it’s really been an exercise for the market to determine and get the equilibrium as to what it’s willing to pay, based around this extraordinary move and interest rates. And now what the market is willing to pay from a future cash flow standpoint. I think the second half of the year is a lot more interesting. I think the second half of the year is ultimately – comes to roost around balance sheets trying to determine and factor in a real, extraordinary move in interest rates. And what does that do to balance sheets? So, Capstone, we believe that that means that CFOs and ultimately, corporate balance sheets are going to determine how they’re going to fare based around a certainly a new level of interest rates that we haven’t seen for the last 10 years. And most importantly, we haven’t seen the speed of these rising interest rates for the last 40 years. 
So, I struggle — and I’ve been doing this for so long now — I struggle to believe that that’s not going to catch out certain operators that haven’t turned out their balance sheet, that haven’t turned out the debt. And so, whether that’s in a levered loan space, whether that’s in high yield, I don’t think it’s going to impact the large, multi-cap, IG credit companies. I think that you’ll see some surprises, and that’s what we’re getting ready for. That’s what we’re preparing for because I think that’s phase two. Phase two could see a credit cycle, where you get these idiosyncratic moves and these idiosyncratic events, that for the likes of CNBC and the viewers of CNBC, perhaps will be surprised by some of these surprises, and that could cause a change of behavior, at least from the volatility market standpoint.
Picker: And that’s what I was referring to when I said we haven’t really seen a cataclysmic event. We’ve seen volatility for sure, but we haven’t seen massive amounts of stress in the banking system. We haven’t seen waves of bankruptcies, we haven’t seen a full blown recession — some debate the definition of a recession. Are those things coming? Or is just this time fundamentally different?
Britton: Ultimately, I don’t think that we’re going to see — when the dust settles, and when we meet, and you are talking in two years’ time – I don’t think that we’ll see a remarkable uptick in the amount of bankruptcies and defaults etc. What I think that you will see, in every cycle, that you will see headlines hit on CNBC, etc, that will cause the investor to question whether there’s contagion within the system. Meaning that if one company’s releases something which, really spooks investors, whether that’s the inability to be able to raise finance, raise debt, or whether it’s the ability that they’re having some issues with cash, then investors like me, and you are going to then say, “Well hang on a second. If they’re having problems, then does that mean that other people within that sector, that space, that industry is having similar problems? And should I readjust my position, my portfolio to make sure that there isn’t a contagion?” So, ultimately, I don’t think you’re going to see a huge uptick in the amount of defaults, when the dust has settled. What I do think is that you’re going to see a period of time where you start to see numerous amounts of headlines, just simply because it’s an extraordinary move in interest rates. And I struggle to see how that’s not going to impact every person, every CFO, every U.S. corporate. And I don’t buy this notion that every U.S. corporate and every global corporate has got their balance sheet in such perfect condition that they can sustain an interest rate hike that we’ve [been] experiencing right now.
Picker: What does the Fed have in terms of a recourse here? If the scenario you outlined does play out, does the Fed have tools in its tool kit right now to be able to get the economy back on track?
Britton: I think it’s an incredibly difficult job that they’re faced with right now. They’ve made it very clear that they’re willing to sacrifice growth at the expense to ensure that they want to extinguish the flames of inflation. So, it’s a very large aircraft that they’re managing and from our standpoint, it is a very narrow and very short runway strip. So, to be able to do that successfully, that is definitely a possibility. We just think that it’s [an] unlikely possibility that they nail the landing perfectly, where they can dampen inflation, make sure that they get the supply chain criteria and dynamics back on track without ultimately creating too much demand destruction. What I find more interesting – at least that we debate internally at Capstone – is what does this mean from a future standpoint of what the Fed is going to be doing from a medium-term and a long-term standpoint? From our standpoint, the market has now changed its behavior and that from our standpoint makes a structural change…I don’t think that their intervention is going to be as aggressive as it once was these past 10, 12 years post-GFC. And most importantly for us is that we look at it and say, “What is the actual size of their response?” 
So, many investors, many institutional investors, talk about the Fed put, and they’ve had a great deal of comfort over the years, that if the market is faced with a catalyst that needs calming, needs stability injected into the market. I will make a strong case that I don’t think that that put was – what’s described as obviously the Fed put — I think it’s a lot further out of the money and more importantly, I think the size of that intervention — so, in essence, the size of the Fed put — is going to be significantly smaller than what it has been historically, just simply because I don’t think any central banker wants to be back in this situation with arguably runaway inflation. So, that means, I believe that this boom bust cycle that we’ve been in these past 12-13 years, I think that ultimately that behavior has changed, and the central banks are going to be much more in a position to let markets determine their equilibrium and markets ultimately be more freer.
Picker: And so, given this whole backdrop — and I appreciate you laying out a possible scenario that we could see — how should investors be positioning their portfolio? Because there’s a lot of factors at play, a lot of uncertainty as well.
Britton: It’s a question that we ask ourselves at Capstone. We run a large complex portfolio of many different strategies and when we look at the analysis and we determine what we think some possible outcomes are, we all draw the same conclusion that if the Fed isn’t going to intervene as quickly as once they used to. And if the intervention and size of those programs are going to be smaller than what they were historically, then you can draw a couple of conclusions, which ultimately tells you that, if we do get an event and we do get a catalyst, then the level of volatility that you’re going to be exposed to is just simply going to be higher, because that put, an intervention is going to be further away. So, that means that you’re going to have to sustain volatility for longer. And ultimately, we worry that when you do get the intervention, it will be smaller than what the market was hoping for, and so that will cause a greater degree of volatility as well. 
So, what can investors do about it? Obviously, I’m biased. I’m an options trader, I’m a derivatives trader, and I’m a volatility expert. So [from] my standpoint I look at ways to try and build in downside protection – options, strategies, volatility strategies – within my portfolio. And ultimately, if you don’t have access to those types of strategies, then it’s thinking about running your scenarios to determine, “If we do get a sell off, and we do get a higher level of volatility than perhaps what we’ve experienced before, how can I position my portfolio?” Whether that is with using strategies such as minimum volatility, or more defensive stocks within your portfolio, I think they’re all good options. But the most important thing is to do the work to be able to ensure that when you’re running your portfolio through different types of cycles and scenarios, that you’re comfortable with the end result. More

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Traders on the floor of the NYSE, August 1, 2022.
Source: NYSE

The SPAC boom is officially a thing of the past.
Not a single special purpose acquisition company was issued in July as the market slowdown turned into a screeching halt, according to CNBC calculations of SPAC Research data. Sponsors who once took advantage of a hot market were forced to pause as investor interest waned and regulatory pressure ramped up.

Arrows pointing outwards

SPAC investors have turned their backs on speculative high-growth equities with unproven track records after many of these firms failed to meet inflated forecasts. Meanwhile, regulators started to look into deals that entice investors with forward-looking statements after a boom in 2020 and 2021 created more than 600 SPACs hunting for targets before time runs out.
“I think that was a once-in-a-lifetime experience just like during the internet bubble,” said Jay Ritter, University of Florida finance professor. “A year ago, the whole market was overpaying and now we have a reset. Giving a valuation of $500 million on a zero revenue company … those days are gone.”
A recent acquisition highlighted just how absurd SPAC valuations were during the mania. Nikola recently announced it will buy Romeo Power in a $144 million all-stock transaction. That’s just about 10% of Romeo Power’s valuation when it merged with a SPAC less than two years ago.
Along with issuance drying up, liquidations are rising amid difficulties in finding suitable targets. Three deals were tabled last month, including Bill Ackman’s record $4 billion Pershing Square Tontine, pushing the number of liquidations this year to 10 deals. In all of 2021, only one SPAC was liquidated, according to the calculations.
“We expect the acquisition landscape to remain highly competitive, and caution that many SPACs are likely to be pressured on time to find suitable targets,” Venu Krishna, deputy head of U.S. equity research at Barclays, said in a note.
— CNBC’s Gina Francolla contributed reporting. More

A customer walks towards the entrance of a CVS Health Corp. store in downtown Los Angeles, California, U.S., on Friday, Oct. 27, 2017.
Christopher Lee | Bloomberg | Getty Images

Check out the companies making headlines in midday trading Wednesday.
Gilead Sciences — Shares of the biopharma company rose 6.6% after quarterly revenue of $6.26 billion smashed a FactSet estimate of $5.86 billion. Full-year revenue guidance of $24.5 billion also came in better than expected.

CVS Health — The pharmacy giant’s shares rose 5.7% after the company beat Wall Street’s expectations for the second-quarter earnings. It also posted a same-store sales increase of 8% compared with the same period a year ago, citing customer purchases of at-home Covid test kits and cough, cold and flu medications.
Electronic Arts — The video game company rose 4% after it reported adjusted earnings of 47 cents per share, beating a Refinitv forecast of 28 cents per share for its most recent quarter. Net bookings of $1.30 billion also beat estimates of $1.26 billion, thanks in part to strength in the EA’s FIFA franchise.
Charles River Laboratories — Shares dropped 9.2% after the pharmaceutical company reduced full-year guidance, citing a stronger dollar and rising interest rates.
Starbucks — The coffee chain saw shares edge higher by more than 3% after it reported better-than-expected quarterly results, despite lockdowns in China weighing on its performance. Within the U.S., however, net sales rose 9% to $8.15 billion and same-store sales grew 3%.
Moderna — Shares of the vaccine stock jumped 16.7% after Moderna’s second-quarter results easily topped Wall Street estimates. The company reported $5.24 in earnings per share on $4.75 billion of revenue. Analysts surveyed by Refinitiv were expecting $4.55 in earnings per share and $4.07 billion of revenue. Moderna also announced a $3 billion share buyback program.

SoFi Technologies — Shares soared more than 27% after the personal finance company posted a beat on the top and bottom lines, issued strong full-year revenue guidance and reported a 91% jump in personal loan origination volume.
Match Group —  Shares of the dating app operator tumbled 17% after the company reported revenue of $795 million for the second quarter, compared with a StreetAccount estimate of $803.9 million. Match also issued weak guidance and announced the departure of Renate Nyborg, CEO of its Tinder unit.
Airbnb — Shares of Airbnb slipped about 3% after the vacation home rental company posted weaker-than-expected revenue for the second quarter. The company also reported more than 103 million booked nights and experiences, the largest quarterly number ever for the company but short of StreetAccount estimates of 106.4 million.
PayPal — The payments giant’s shares soared 9.4% following stronger-than-expected second-quarter results and an increase in its forecast. PayPal also revealed it has entered into an information-sharing agreement with Elliott Management and announced a $15 billion share buyback program.
 — CNBC’s Jesse Pound and Sarah Min contributed reporting

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Check out the companies making headlines before the bell:
CVS Health (CVS) – The drugstore operator and pharmacy benefits manager saw its shares rise 3.8% in the premarket after beating top- and bottom-line estimates and raising its full-year earnings forecast. Results were helped by strong sales of over-the-counter Covid-19 tests as well as an upbeat performance by its insurance unit.

Under Armour (UAA) – The athletic apparel maker gained 2% in premarket action despite cutting its full-year earnings forecast. Increased promotional activity and currency headwinds have impacted Under Armour’s profit margins, but it did report earnings for its most recent quarter that matched estimates and revenue that was slightly ahead of consensus.
Moderna (MRNA) – The vaccine maker reported better-than-expected profit and revenue for its latest quarter and also announced a $3 billion share repurchase program. Moderna also maintained its full-year sales outlook, and its stock gained 2.6% in premarket action.
Starbucks (SBUX) – Starbucks shares rose 1.8% in the premarket after it reported better-than-expected quarterly profit and revenue. Global comparable store sales did come in below forecasts, however, due to weakness in the locked-down China market.
Sierra Wireless (SWIR) – The provider of connectivity technology agreed to be acquired by Canadian semiconductor maker Semtech for $31 per share in cash or $1.2 billion. Sierra Wireless surged 7.8% in the premarket, while Semtech shares fell 1.5%.
Dish Network (DISH) – The satellite TV company added 1.3% in premarket trading after reporting better-than-expected quarterly earnings. The bottom-line beat came despite a slight revenue miss and the loss of 257,000 pay TV subscribers during the quarter.

SoFi (SOFI) – The fintech company’s stock soared 10.9% in premarket action after it reported a smaller-than-expected loss and better-than-expected revenue. It also issued strong full-year revenue guidance. Results were helped by a 91% jump in personal loan origination volume. 
Match Group (MTCH) – Shares of the dating service operator tumbled 21.4% in the premarket after it reported lower-than-expected quarterly results and said top-line growth would be flat during the second half of the year. Match also announced the departure of Renate Nyborg, CEO of its Tinder unit.
Airbnb (ABNB) – Airbnb reported better-than-expected quarterly earnings with its revenue essentially in line, as travel demand boomed. However, the stock slid 7.3% in premarket trading after it issued a lighter-than-expected bookings forecast for the current quarter.

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The Reddit logo is seen on a smartphone in front of a displayed Wall Street Bets logo in this illustration taken January 28, 2021.
Dado Ruvic | Reuters

Think the meme stock mania is so 2021? Just take a look at AMTD Digital.
The little-known Hong Kong-based fintech firm saw its shares skyrocket 126% Tuesday alone after experiencing a series of trading halts. AMTD Digital, a subsidiary of investment holding firm AMTD Idea Group, went public in mid-July with its American depositary receipts trading on the NYSE. Two weeks later, the stock is up 21,400% to $1,679 apiece from its IPO price of $7.80.

The monstrous move pushed its market cap above $310 billion as of Tuesday, making it bigger than Coca-Cola and Bank of America, according to FactSet. AMTD Digital generates revenue primarily from fees and commissions from its digital financial services business, and it only made $25 million in 2021, according to a regulatory filing.

Arrows pointing outwards

The wild trading is reminiscent of the GameStop mania of 2021 where a band of Reddit-obsessed retail investors managed to push up shares of the video game retailer and squeeze out short selling hedge funds. Indeed, the ticker HKD became the most popular mention on Reddit’s WallStreetBets chatroom Tuesday, according to alternative data provider Quiver Quantitative.
AMTD Idea Group’s ADR was also the single-most actively traded stock on the Fidelity platform Tuesday. The stock has popped nearly 300% this week.
The intense speculative behavior among retail investors is unnerving many on Wall Street yet again.
“As we’ve learned over the past two years, events like this cause what I would say is opportunities for profit but great risk for loss particularly for our retail investors,” Jay Clayton, former SEC chairman, said on CNBC’s “Squawk Box” Wednesday.

Famed short seller Jim Chanos took it to Twitter and expressed frustration about the mania.
“So we’re all just going to ignore the $400B meme stock in the room?” Chanos said in a tweet. “We literally had Congressional hearings over the $30B runs of $GME and $AMC, but just [crickets] today.
The crazy moves, based on no material news, also shocked the company itself. AMTD Digital issued a “thank you note” to investors Tuesday, adding it’s monitoring the market closely for any trading abnormalities. 
“To our knowledge, there are no material circumstances, events nor other matters relating to our Company’s business and operating activities since the IPO date,” the company said in the statement.

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Credit Suiise shares are down more than 42% year-to-date, as new CEO Ulrich Koerner takes the reins following the resignation of Thomas Gottstein last week. 
Moody’s on Monday downgraded Credit Suisse’s senior unsecured debt and deposit ratings by one notch and maintained a negative outlook on the bank’s credit trajectory.
S&P Global Ratings on Monday revised its outlook on Credit Suisse to negative, citing increasing risks to the stability of the bank’s franchise, uncertainty around the reshuffling of top executives, and a “lack of a clear strategy,” along with continued weak profitability over the medium term. 

Speculation has emerged in recent months that Credit Suisse may be considering a capital raise.
Thi My Lien Nguyen | Bloomberg | Getty Images

Credit Suisse shares slipped on Wednesday after Goldman Sachs downgraded the stock to “sell” following credit rating downgrades from Moody’s and S&P.
The embattled Swiss lender’s shares were down slightly by early afternoon trade in London, having recouped some of their earlier losses, and remain down more than 42% year-to-date, as new CEO Ulrich Koerner takes the reins following the resignation of Thomas Gottstein last week. 

The bank announced a new strategic review after reporting a second-quarter net loss of 1.593 billion Swiss francs ($1.66 billion), well below consensus, as poor investment bank performance and mounting litigation provisions hammered earnings.
Goldman Sachs noted on Tuesday that Credit Suisse has underperformed the rest of the sector by 59% since the start of 2021, due to company-specific events and industry-wide obstacles to revenue.
The Wall Street giant expects this underperformance to continue over the next 12 months as investment bank returns remain suppressed through to 2024, and projected a pause in near-term wealth management performance due to outflows and subdued market performance.
“On capital, while we foresee no near-term shortfall, organic capital generation is below peers and RWA (risk-weighted assets), inflation plus litigation plus restructuring has the potential to further deplete capital to a relatively low buffer vs regulatory minimums,” Executive Director Chris Hallam and his team said in Tuesday’s note.
Despite the more favorable picture Goldman sees across the European banking space — in which higher interest rates will boost revenue and returns forecasts, reinvestment in new technology will enhance returns, and excess capital can be distributed to shareholders — Credit Suisse is valued roughly in line with the sector at present.

“Our revised 12-month price target implies 5% upside, but in the context of c.60% upside on average across our Banks coverage, this equates to meaningful underperformance: accordingly, we downgrade the stock to Sell from Neutral,” Goldman said.
Credit downgrades
Moody’s on Monday downgraded Credit Suisse’s senior unsecured debt and deposit ratings by one notch and maintained a negative outlook on the bank’s credit trajectory.
“The downgrade of CS’s ratings reflects the challenges the group is facing in successfully executing on its previously announced repositioning of its investment bank in the more difficult macroeconomic and market environment as well as uncertainty as to the business and financial implications of the group’s plans to take further steps to achieve a more stable, capital light and better aligned investment banking business,” Moody’s said in its update.
The ratings agency also cited “the crystallisation of large financial losses during H1 2022, resulting in stress on the bank’s financial profile and potential delays in technology investments, and in the transformation of the business and an expectation of continued weak performance in 2022.”

Furthermore, Moody’s highlighted evidence of an erosion of Credit Suisse’s market share and “franchise impairment” in its investment bank, following deleveraging in its capital-intensive businesses and exit from its prime brokerage business.
The ongoing overhaul of its risk and compliance operations is “lengthy and resource-consuming,” while stabilizing the group under new leadership and a fresh senior executive team will take time, Moody’s said.
“These factors are partially mitigated by the firm’s solid – although decreasing – capitalisation and strong liquidity and funding profiles,” it added.
Credit Suisse Chairman Axel Lehmann told CNBC last week that the new strategic review will look to accelerate restructuring efforts. 
The review will aim to drastically reduce the group’s cost base, strengthen its wealth management, Swiss banking and asset management operations, and transform the investment bank into a capital-light, advisory-led banking business with a greater focus on markets.
However, Moody’s cited uncertainty over the bank’s “ability to successfully execute” on the “as yet to be defined” restructuring strategy, along with “governance deficiencies and top management instability,” in a one-notch downgrade for corporate behavior on Credit Suisse’s scorecard.
S&P Global Ratings on Monday revised its outlook on Credit Suisse to negative, citing increasing risks to the stability of the bank’s franchise, uncertainty around the reshuffling of top executives, and a “lack of a clear strategy,” along with continued weak profitability over the medium term. 
“The negative outlook reflects the setbacks Credit Suisse could face in redesigning its strategy, with new management at the helm, in order to transform the bank in an increasingly difficult operating environment,” S&P said.

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The Fed has a good chance of not tanking the economy and achieving a soft landing, St. Louis Fed President James Bullard said.
Markets lately have been making the opposite bet, namely that a hawkish Fed will hike rates so much that an economy will fall into a recession.

James Bullard
Olivia Michael | CNBC

St. Louis Federal Reserve President James Bullard said Tuesday that he still thinks the economy can avoid a recession, even though he expects the central bank will need to keep hiking rates to control inflation.
“I think that inflation has come in hotter than what I would have expected during the second quarter,” the central bank official said during a speech in New York. “Now that that has happened, I think we’re going to have to go a little bit higher than what I said before.”

The fed funds rate, which is the central bank’s benchmark, likely will have to go to 3.75%-4% by the end of 2022, Bullard estimated. It currently sits at 2.25%-2.5% following four rate hikes this year. The rate sets the level banks charge each other for overnight lending but feeds through to many adjustable-rate consumer debt instruments.
Nevertheless, Bullard said the Fed’s credibility in its dedication to fight inflation will help it avoid tanking the economy.

Bullard compared the Fed’s current situation to the problems central banks faced in the 1970s and early ’80s. Inflation is now running at the highest points since 1981.
He expressed confidence that the Fed today will not have to drag the economy into a recession the way then-Chairman Paul Volcker did in the early 1980s.
“Modern central banks have more credibility than their counterparts in the 1970s,” Bullard said during a speech in New York. “Because of this … the Fed and the [European Central Bank] may be able to disinflate in an orderly manner and achieve a relatively soft landing.”

Markets lately have been making the opposite bet, namely that a hawkish Fed will hike rates so much that an economy that already has endured consecutive quarters of negative GDP growth will fall into a recession. Government bond yields have been heading lower, and the spread between those yields has been compressing, generally a sign that investors are taking a dim view of future growth.
In fact, futures pricing indicates that the Fed will have to follow its rate increases this year with cuts as soon as the summer of 2023.
But Bullard argued that the ability for the Fed to steer the economy toward a soft landing rests largely on its credibility, specifically whether the financial markets and the public believe the Fed has the will to stop inflation. He differentiated that from the 1970s era when the Fed enacted rate hikes when faced with inflation but quickly backed off.
“That credibility didn’t exist in the earlier era,” he said. “We have a lot more credibility than we used to have.”
Bullard will appear Wednesday on CNBC’s “Squawk Box” starting at 7:30 a.m. ET.

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