Powell Signals More Hikes Coming, While Markets Detect Pivot

“We do see that there are two-sided risks,” he said. “There would be the risk of doing too much and imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation — it only raises the cost.”

He said it wasn’t the committee’s intention to tip the economy into a recession, while noting that to achieve their 2% inflation goal slack would have to increase. That means unemployment would have to rise somewhat, while the economy would have to slow to below its full potential.

Fine Line

Walking that line between barely growing and recession is hard for any central bank to achieve. The economy becomes more vulnerable to shocks, and business sentiment can suddenly sour if profits start to vanish, triggering a deeper downturn.

Driving market sentiment is rising recession chatter spurred by anticipation that Thursday’s report on second-quarter US gross domestic product will show scant growth, and expectations of lower profits at major retailers.

Investors have a reflexive expectation that the Fed will pivot to easing — maybe as early as next year —  to catch the economy if it falters, as it has done time and again over the past two decades. But in those years, inflation was contained and low, and often traveling below the committee’s target.

“The market is anchored to the playbook of the last two recessions,” said Derek Tang, an economist at LH Meyer in Washington. “The world is different now — inflation is a lot higher.”

Source: Bloomberg

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