Pre-market stock: The Fed’s risky experiment with inflation control

“For sure, we’ll see 75 basis points after this meeting,” Bill Dudley, the former president of the Federal Reserve Bank of New York, told CNN.

But interest rates are not the only tool at the Fed’s disposal. It has also begun the process of shrinking its massive balance sheet after buying trillions of dollars in financial assets during the Covid-19 pandemic.

“If the economy remains overheated and inflation remains stubborn, that’s part of the policy matrix,” Joseph Brusolas, chief economist at RSM US, told CNN Business.

He believes Fed Chairman Jerome Powell should make clear that, if necessary, the Fed could dump bonds at a faster pace and start selling mortgage-backed securities, which could help relieve pressure in the housing market.

So-called “shelter” costs are rising at the fastest rate in decades. This is worrying, since it is a source of inflation, it tends to stay.

“When you fill up the gas tank, people can look at that and say, ‘Maybe next week will be cheaper,’” said Ronald Temple, co-head of multi-asset and head of US equities at Lazard Asset Management. “The rent is a closed account for one or two years.”

But shrinking the balance sheet – a process known as “quantitative tightening” or QT – also carries risks. The Fed has never cut this size.

After devouring government bonds and mortgage securities during the Great Recession, the Fed began shrinking its balance sheet — which then contained just $4.5 trillion in assets — in late 2017. It halted the operation in 2019 as markets panicked.

This time it might be different.

“The last time the Fed tried to do that, there was no inflation,” Temple said.

However, he believes that the effects of quantitative tightening are likely to reverberate in the markets. Stocks, bonds, and cryptocurrencies skyrocketed when the Federal Reserve was in buying mode. What happens when he changes course?

“I think investors underestimate the impact of Qt,” Temple said. “Central banks have manipulated all the markets.”

Layoffs rock vulnerable industries

So far, even with investors worried about the next move for the US economy, the job market has remained strong.

US employers added 390,000 jobs in May. The pace of hiring was strong, albeit slower than in April.

But industries exposed to rising interest rates and market volatility are beginning to reduce roles. This can portend difficult times ahead.

Crypto Exchange Coinbase announced on Tuesday that it is laying off 18% of its staff as the crypto market crashes.

CEO Brian Armstrong said in an open letter that the “difficult decision” to lay off about 1,000 employees was made to ensure “we stay healthy during this economic downturn.” The stock exchange employs more than 4,900 employees.

He warned that “a recession could lead to a new crypto winter, and it could last for a long time.”

A step back: Coinbase’s market cap has collapsed in recent months. One year ago, the company was valued at nearly $50 billion. Now it is valued at less than $12 billion.

Crypto companies aren’t the only ones facing pressure to control costs. Real estate brokerage Redfin said Tuesday it will lay off about 8% of its staff as it battles the rapid rise in mortgage rates.

“Mortgage rates are going up faster than ever,” CEO Glenn Kellman told employees. “We could be facing years, not months, of declining home sales.”

Redfin’s stock is down nearly 80% since the start of the year.

Where did the “bear” come from in the bear market?

This week, US stocks plunged into a bear market, having fallen more than 20% from their recent highs in early January.

But why would a jungle mammal associate with frightened investors dumping stocks on Wall Street?

My colleague Alison Morrow did some digging. I discovered that the term derives from “bear skin,” which was used in the 18th century as a metaphor for the type of speculative trading known today as shorting, or betting that a stock will go down.

It came from a proverb that warns against “selling the bear’s skin before the bear catches it,” according to Merriam-Webster.

Bearskin has been shortened to bear, and here we are.

The term flared up after the South Sea Bubble of 1720, and again after the crash of 1929 that led to the Great Depression.

Another idea is that the bear attacks by passing its paws down on its prey. Swipe down = Stock goes down. It seems as fair a premise as any.

next one

US Retail Sales for May at 8.30 AM ET, followed by the NAHB Housing Market Index for June at 10 AM ET.

The Federal Reserve’s latest policy decision will be published at 2 PM ET, followed by a press conference.

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