March 27, 2023

The Fed May Have Changed the Market Forever | CNN Business

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It’s safe to say that the world economy is in a pretty bad place right now: the vast majority of economists think we’re on the brink of a recession. But the US market doesn’t seem to care. Stocks ended their best week since mid-June last Friday and continued to rise into Monday.

So what to give? Nomi Prins argues that a decade of free money flowing from the Federal Reserve to the banks has created two economies., Former CEO of Goldman Sachs and author of “Permanent Distortion: How the Financial Markets Abandoned the Real Economic Forever.” Wealthy Americans and businesses benefited directly from years of low interest rates, keeping money flowing into businesses and stocks high, while Main Street suffered from slowing wages and a little support. Prins says we are now dealing with a “permanent distortion” where market behavior and economic well-being have nothing to do with each other.

What is happening: The stock market has always been unpredictable. Analysts and economists try to predict or apply some kind of rational explanation to market movements, but the reality is that it’s often guesswork (strong, educated guesses, but guesses nonetheless).

That has become increasingly evident in the very strange, volatile markets we see today. Federal Reserve officials have made it clear that they have no plans to turn away from aggressive rate-raising policies to combat persistent inflation. The economic data is bleak, and CEOs, economists and global organizations are sounding the alarm bells of an impending recession.

But the market, which has taken quite a beating this year, is back at multi-month highs. It has become pointless to try to apply economic principles to the stock market, Prins told me in a recent interview.

Second Mandate: The Federal Reserve is mandated to keep unemployment and prices under control, but the Fed’s third unofficial mandate is to stimulate markets, Prins said. “We’ve seen that over the last 14 years,” he added. Beginning in 2008, overnight bank lending rates in the United States were set low, close to zero, and central bank officials pursued an aggressive monetary easing policy, infusing money into the financial system by purchasing government securities from the United States government. This created a widespread idea in the financial world that the stock market will go up no matter what, he explained.

Most of that stimulus flowed upward into the market rather than out into the economy at large, creating a world where investors became dependent on the central bank while the larger economy suffered, Prins said.

Credibility problem: When the Federal Reserve began raising interest rates earlier this year, officials publicly explained the importance of their credibility in successfully calculating inflation. If the Fed is going to succeed, they said, Americans should trust that the central bank will be steadfast in its fight to lower rates.

But investors don’t believe that, says Prins. That’s why they keep seeming to think a policy reversal is coming, even when the Fed claims it isn’t. They understand, Prins says, that eventually the Fed will return to its long-term policy to help the market.

Meanwhile, he says, Main Street, not Wall Street, will feel the brunt of these rate hikes thanks to higher mortgage and loan rates and a slowing job market.

Recession predictions are a dime a dozen these days, but some are more severe than others. Like this: Nearly two-thirds of business economists believe the U.S. is already in a recession or will be in one within the next 12 months, according to the latest survey by the National Association for Business Economics.

More than half of NABE respondents said they believe there is a greater than 50 percent chance America will experience a recession in the next year, and 11 percent said they believe the nation is already in one, according to a survey released Monday, my colleague says. Alicia Wallace.

Despite a strong recovery from the Covid-19 pandemic, the US economy has been weighed down by months of historically high inflation. The Federal Reserve has stepped up its efforts to reduce high prices with a series of successful rate hikes.

The high inflation environment has led to it business price increases – 52% of respondents said the prices their businesses charged rose in the third quarter – but the latest survey shows some prices have started to fall back. A total of 9 percent of respondents reported that prices will decrease, which is the highest proportion since January 2021.

The study also showed that material costs in the third quarter were the lowest since April 2021.

According to the study, the lack of raw materials and labor still hinders the operations of companies. The proportion of respondents reporting a shortage remained close to the record level.

Rishi Sunak, Britain’s third prime minister in seven weeks, faces the huge challenge of projecting stability after historic political and financial chaos. But his other task — shepherding the country through recession — may be just as daunting, says my colleague Julia Horowitz.

Sunak said Monday that his “primary goal was to bring our party and our country together” in the face of a “deep economic challenge.”

Sunak campaigned for work during the summer by promising to help households cope with the rising cost of living, which is causing many to cut back on spending. He said he would cut taxes, but only when price pressures eased.

Yet the economic outlook has deteriorated sharply since then – not least because of the market turmoil caused by Truss’s now-abandoned plan to cut taxes as soon as possible and increase government borrowing.

Investors will be watching closely over the next few weeks for hints about Sunak’s plans to turn things around.

▸ Coca-Cola ( KO ), UPS ( UPS ), Raytheon ( RTN ), Twitter ( TWTR ), and GE ( GE ) reported third-quarter earnings before the bell.

▸ Microsoft ( MSFT ), Alphabet ( GOOG ), Visa ( V ), Spotify ( SPOT ), and Chipotle ( CMG ) reported third-quarter earnings after the market closed.

Plus: The Conference Board is expected to release October’s consumer confidence, which measures consumers’ confidence in the economy, at 10 a.m. ET.

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