The Federal Reserve and notions of an impending stock market crash are set to clash once again at tomorrow’s long-awaited Federal Open Market Committee (FOMC) meeting. With inflation coming in light this morning, many analysts believe the Fed may opt to pause its rate hike campaign. This would make for a relative rarity for the central bank since it started raising rates a year ago.
For most of this year, the Fed has hinted at an impending recession to hit the U.S. in the second half of the year. Reasonably so, when you consider the uncertainty surrounding this year’s regional banking crisis, the now-resolved debt ceiling deadline, and of course, the 10 rate hikes the Fed has levied over the past year, the idea the economy may waver in the face of a virtual black-swan bombardment, seems valid.
While most members of the Fed, and perhaps especially Fed Chair Jerome Powell, are typically quite reserved in sharing their expectations, it wouldn’t come as a surprise to see a shred of positivity from Fed officials this time.
“There is immense pressure on the Fed to restore and defend confidence in the US dollar as the world’s reserve currency. The US dollar has become a symbol of the US economy more broadly, so a lot hinges on Fed stability, credibility, and competence,” Fergus Hodgson, director at Econ Americas, told InvestorPlace. “The key messages from the Fed will be that inflation will continue to fall and that the US economy is well managed, whether these assertions are true or not.
Stock Market Crash Fears Subdued Ahead of June FOMC Meeting
Despite the onslaught of bearish catalysts, as it stands, the economy is doing pretty well. Unemployment is hovering around 3.7%, a historic low, household spending is relatively unchanged year-over-year, and inflation is showing clear signs of easing.
While it may be too early for champagne, Jerome Powell’s oft-mentioned “soft landing” has never looked more possible.
Most analysts expect the Fed will leave interest rates alone tomorrow, for good reason. Today’s May Consumer Price Index (
CPI) inflation report came in surprisingly strong, recording only a 0.1% increase month-over-month. In fact, annual inflation slowed to 4% from 4.9%, the lowest level since March 2021.
Now, much of last month’s deflation is due to dips in food and energy prices, considered both volatile and only tenuously linked to the country’s monetary environment. Indeed, core inflation, which excludes food and energy costs, actually increased 0.4% in June for the third consecutive month.
That said, no one expects inflation to drop to 2% overnight. Today’s report could easily be read as a sign that prices are slowly but surely easing.
This time around, there is little fear of a Fed-induced stock market crash, a refreshing change of pace for analysts and investors alike. In fact, depending on Powell’s comments, stocks may be liable to rise. Hodgson noted:
“I see no major change coming tomorrow, with broader trends—including foreseen Fed actions—already priced in. On the margins, though, rising confidence in Fed management suggests a more favorable environment for conventional stocks and bonds, as opposed to alts and more exotic stocks.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
