Fed Chair Powell and investors disagree on US economy

Federal Reserve Chairman Jerome Powell speaks at a press conference following the Federal Open Market Committee meeting in Washington, DC on May 3, 2023. Anna Moneymaker — Getty Images

Within hours of the Federal Reserve’s latest policy decision, traders and commentators alike began to challenge Chairman Jerome Powell’s policies. evaluation of the economy.

of bond market Powell shook off the prospect There might be one more hike up his sleeve, instead adding to the bet that the US Central Bank’s next move is to cut its benchmark interest rate. Falling oil prices signal growing fears of a recession that the Fed chairman said could be avoided.and financial stocks Even after seeing Chairman Powell draw a line under US bank turmoil, it fell again.

DoubleLine Capital’s Jeffrey Gundlach told CNBC that a recession is becoming more likely and the Fed is unlikely to raise rates again following the recent rate hikes. On the other hand, at the Milken Institute Global Conference, speak among panelists proposed a consensus view that contraction is inevitable.

WTI crude fell 4.3% on Wednesday, reflecting concerns over slowing economic growth in major economies.It fell 7.2% at once. chaotic Markets opened Thursday before rebounding.

Lindsay Rosner, Multi-Sector Portfolio Manager at PGIM Fixed Income. “When Powell says the framework they’re basing it on is one of moderate growth, not recession, he suggests that if we see a recession, we need to change course. That’s why we believe they have to cut.”

In fairness to Powell, he said Wednesday’s rate hike, which lifted the benchmark rate above 5%, could be the last in a cycle that lifted borrowing costs from near-zero levels last year. The Fed chief said there was 25 basis points of strong support for a rate hike this week, but officials suggested they could pause the tightening campaign in June.

Powell also acknowledged that the pace of bank lending has slowed. And while US economic data show a slowing labor market, they have not yet indicated a recession is imminent.

quick response

But news moves fast and traders tend to anticipate rather than wait how things will unfold.

U.S. Treasuries rose as investors stepped up bets that the Federal Reserve rate would be cut by the end of the year, despite Powell’s insistence that the central bank’s inflation outlook does not support policy easing. surged on Wednesday. By the end of the day, even June’s swap contracts showed a lower effective federal funds rate.

Meanwhile, Bloomberg News reports: Pakwest Bancorp was weighing strategic options, but doubling down on fears that a small U.S. inter-bank disruption would cause more casualties and tighten credit conditions.

Since early March, four US banks have failed. First Republic Bank, federal regulators seized this week. Powell called the First Republic resolution “an important step towards drawing the line” amid banking turmoil.

But PacWest’s report sparked fresh selling in financial stocks in aftermarket trading.

“The market will be looking for signs that the tightening of credit is starting to affect activity and labor market data,” said Vasily Serebriakov, currency and macro strategist at UBS Securities in New York. “With the Fed hinting at a moratorium today, any weakness in the data would reinforce the view that the tightening cycle is over,” he said.

Powell said on wednesday It is possible that the U.S. could experience a mild recession, but “I think the case of avoiding a recession is more likely than experiencing one.” job openings, but not with rising unemployment, he said.

but, milken conference Attendees expressed concerns. Guggenheim Capital’s chairman Alan Schwartz told Bloomberg Television he is concerned about the impact of the credit tightening and how far banks will have to pull back. Franklin Templeton CEO Jenny Johnson also said the Fed’s pace of rate hikes is stressing the banking system and the potential for further job cuts as a result.

“We are more bearish right now,” said Gundlach, co-founder of DoubleLine Capital, citing cumulative Fed rate hikes and credit crunch after March 2022. He said the Federal Reserve would not raise rates again following its recent rate hikes. “Right now, the likelihood of a recession is very high.”

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