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Business

Here are three things the Fed has done wrong, and what is still not right




The exterior of the Marriner S. Eccles Federal Reserve Board Building was seen in Washington, DC, on June 14, 2022.

Sarah Silbiger | Reuters

After years of being a beacon for financial markets, the Federal Reserve suddenly finds itself in other ways as it tries to navigate the economy through a vicious bout of inflation and away from increasingly darker recession clouds.

Complaints about the Fed have a familiar tone, with economists, market strategists and business leaders weighing in on what they feel are a series of political mistakes.

The complaints are mainly about three themes for actions past, present and future: that the Fed did not act quickly enough to tame inflation, that it is not acting aggressively enough now even with a number of interest rate increases, and that it should have been better at seeing the current crisis is coming.

“They should have known that inflation was expanding and becoming more entrenched,”[ads1]; said Quincy Krosby, chief strategist at LPL Financial. “Why have you not seen this coming? This should not have been a shock. I think it is a concern. I do not know if it is as strong a concern as” the emperor has no clothes. “But it is the man in the street versus the doctoral students . “

In fact, consumers had expressed concern about price increases long before the Fed began raising interest rates. However, the Fed stuck to its “temporary” script of inflation for several months before finally adopting a meager quarter-point rate hike in March.

Then things suddenly accelerated earlier this week, when it leaked that politicians became more serious.

“Just do not raise”

The road to the increase of three quarters of an hour on Wednesday was distinctive, especially for a central bank that is proud of clear communication.

After officials for several weeks insisted that walking 75 basis points was not on the table, a Wall Street Journal report said Monday afternoon, with few sources, that there was probably more aggressive action on the way than the planned 50 basis point movement . The report was followed by similar reports from CNBC and other outlets. (A base point is one hundredth of 1 percentage point.)

Apparently this came after a consumer survey on Friday which showed that expectations increased for long-term inflation. This was followed by a report that the consumer price index rose 8.6% in May last year, higher than Wall Street’s expectations.

Krosby addressed the notion that the Fed should have been more foresighted about inflation, and said that it is difficult to believe that the data points could have taken the central bank governors so seriously.

“You come to something that is just not true, that they did not see this before the blackout,” she said, referring to the period before meetings of the Federal Open Market Committee when members are forbidden to address the public.

“You can applaud them for moving fast, not waiting six weeks [until the next meeting]. But then you go back to, if it was so awful that you could not wait for six weeks, how come you did not see it until Friday? ” added Krosby. “It’s the market’s assessment at this point.”

Fed Chairman Jerome Powell did no favors at Wednesday’s press conference as he insisted there is “no sign of a broader downturn that I can see in the economy.”

On Friday, a New York Fed economic model pointed to higher inflation of 3.8% in 2022 and negative GDP growth in both 2022 and 2023, minus-0.6% and minus-0.5%, respectively.

The market did not look favorably on the Fed’s actions, with the Dow Jones Industrial Average losing 4.8% for the week to fall below 30,000 for the first time since January 2021 and wiping out all gains made since President Joe Biden took office.

Why the market moves in a certain way in a certain week is usually someone’s guess. But at least some of the damage seems to have come from impatience with the Fed.

The need to be brave

Although the 75 basis point movement was the largest increase in a single meeting since 1994, there is a feeling among investors and business leaders that the approach still tastes of incrementalism.

After all, the bond markets have already priced in hundreds of basis points for Fed tightening, with the 2-year yield rising around 2.4 percentage points to around the highest level since 2007. The Fed funds yield, however, is still only in a range between 1.5 % and 1.75%, well behind even a six-month treasury bill.

So why not just go big?

“The Fed is going to have to raise interest rates much higher than they are now,” said Lewis Black, CEO of Almonty Industries, a Toronto-based global miner of tungsten, a heavy metal used in a variety of products. “They have to start getting up in the high single digits to snatch this in the bud, because if they do not, if this gets hold of, really gets hold of, it will be very problematic, especially for those with the slightest.”

Black sees the impact of inflation up close, beyond what it will cost his business for capital.

He expects workers at his mines, mainly based in Spain, Portugal and South Korea, to start demanding more money. This is because many of them took advantage of readily available mortgages in Europe and now want higher housing costs as well as sharp increases in daily living costs.

In retrospect, Black believes that the Fed should have started walking last summer. But he sees pointing fingers as useless at this point.

“Ultimately, we should stop looking for who is to blame. There was no choice. This was the best strategy they thought they had to deal with Covid,” he said. “They know what needs to be done. I do not think you can say with the amount of money in circulation that they can just say, ‘let’s raise 75 basis points and see what happens.’ It will not be enough, it will not slow down. “What you need now is to avoid a recession.”

What happens now

Powell has repeatedly said he believes the Fed can make it through the minefield, especially in May that he believes the economy could land a “soft or soft” landing.

But with GDP growth in the second quarter in a row with negative growth, the market is in doubt, and there is a feeling that the Fed should only acknowledge the painful way forward.

“Since we are already in recession, the Fed may just as well cross over and give up the soft landing. I think that is what investors are expecting now in the short term,” said Mitchell Goldberg, president of ClientFirst Strategy.

“We can argue that the Fed went too far. We can argue that too much money was distributed. That is what it is, and now we have to correct it. We have to look ahead now,” he added. “The Fed is far behind the inflation curve. They have to move fast and they have to move aggressively, and that’s what they do.”

While the S&P 500 and Nasdaq are in the bear markets – down more than 20% from recent peaks – Goldberg said investors should not despair too much.

He said that the current market race will end, and investors who keep their heads and stick to their long-term goals will recover.

“People just had this feeling of invincibility, that the Fed would come to the rescue,” Goldberg said. “Every new bear market and recession seems like the worst ever in history, and that things will never be good again. Then we climb out of each one with a new set of stock market winners and a new set of winning sectors in the economy. It always happens. “



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