Interest rate hikes.
The Fed is showing its biggest concern in the short run is fighting inflation. Understandable, as the prospect of continued uncontrolled price increases would strike fear in most any economist. Jay Powell and Co. are certainly showing they are going to address inflation now, with a 0.75 percentage point rate raise this week and additional hikes indicated for later this year.
The markets rallied on the Fed following through on its previous rate raising commitment. The markets seem to think that much of the tightening is being frontloaded and that some signs are pointing towards price pressures receding. This combination of “hopes” is indicative of the markets believing the Fed still has a chance at achieving the proverbial “soft landing”: lowering inflation without tipping us into recession.
Earnings have been a bit of a mixed bag with many companies having tough comparisons and hurdles to exceed. Tech earnings have been front and center. Interestingly, it seems companies who missed earnings are not necessarily being punished by the markets. Take Microsoft and Google for example. Both companies missed their earnings expectations and were up in the afterhours. It’s as if the markets are expecting companies to miss earnings and giving them a bit of a mulligan this quarter.
Inflation remains top of mind for consumers and companies alike. Retailers are particularly struggling with higher inventories, as they stocked up late last year and early this year expecting continued consumer spending. Consumers decided to change their spending habits instead, shifting their money to travel and services over material goods. Some of the price pressures have begun to ease with material costs coming down and energy prices stabilizing, albeit at a markedly higher level.
Recession continues to be the talk of the town as people quibble over whether we are already in one or headed in that direction. As we have mentioned before, economic difficulties never feel good, recession or not. The easing of inflation and supply chain kinks will go a long way to making consumers and companies feel better about the financial future.