Markets hold on to gains despite Fed warnings

Stocks rose on Friday at the end of a week in which a parade of Federal Reserve officials sought to dampen investor exuberance at early signs that inflation may finally be easing.

The S&P 500 gained 0.5% in the early morning, putting the index on track to end the week with a small loss.

This week’s moves largely preserve the rally that followed recent data releases showing consumer and wholesale prices rising less than economists had expected.

Investors are focused on inflation data as they look for signs that the Fed’s efforts to slow the economy by raising interest rates are paying off. If inflation begins to decline, investors hope the Fed will limit future interest rate hikes, which increase costs for consumers and businesses, weighing on the stock market.

The S&P 500 is about 10% above the low it hit in mid-October. The rising stock market creates a problem for the Fed, enriching investors who are then able to recycle that money back into the economy, running counter to the central bank’s efforts to make financial conditions more restrictive.

Several Fed officials this week sought to dampen investor enthusiasm, warning that more evidence of slowing inflation would be needed before the Fed eases its rate hike campaign.

“It could easily go the other way in the next report, and I just don’t want to give too much weight to one-month data,” Federal Reserve Bank of St. Louis president James Bullard said Thursday. .

Mary Daly, president of the Federal Reserve Bank of San Francisco, said Wednesday that she still plans to raise interest rates by at least another percentage point before pausing to allow time for the effect of the Fed’s rate hike so far seeping into the economy. “The hiatus is not an option at this time,” she told CNBC in a broadcast interview.

Like Ms. Daly, a number of Fed officials have suggested that interest rates are likely to rise more than policymakers had expected as recently as September, and stay there for some time. This “higher for longer” strategy would continue to dampen the economy for months.

Some investors said the Fed’s tough line had rekindled fears that the central bank could raise interest rates too much, stifling the economy in recession.

Nearly 80% of respondents to a survey this week from Bank of America, which polled 272 investors responsible for more than $700 billion in assets, said they thought the United States was likely to enter in recession over the next 12 months.

And this week, one of Wall Street’s most-watched recession indicators sounded the strongest alarm yet, as the yield on 10-year Treasuries fell even lower than the yield on the bonds. two-year Treasury, deepening the so-called inverted yield curve. . Generally, investors expect to get a higher return by lending their money to the government for longer periods. When this relationship is turned upside down, with rates on short-term debt higher than those on long-term debt, it suggests that investors believe the Fed will have to cut interest rates in the future to try to support a struggling economy.

“The Treasury yield curve is screaming recession,” said Andrew Brenner, head of international fixed income at National Alliance Securities. But he added he was “still not a believer” given signs of resilience across the economy, citing the Federal Reserve Bank of Atlanta’s forecast for growth of more than 4% for the fourth quarter.

Strong retail sales data this week further complicated the Fed’s picture, adding to signs that the economy remains resilient, which could contribute to stubbornly high inflation.

The mixed picture means that although the Fed intends to continue raising interest rates, it should do so more slowly. Investors are expecting a half-point increase at the central bank’s meeting in December, down from three-quarter-point increases at the past four meetings.

That view was cemented on Wednesday by Christopher Waller, a Fed governor, who said he was more “comfortable” with only raising rates by half a point.

“But I won’t pass judgment on that until I see more data,” he said.

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