Dow tumbles after Fed predicts it will raise rates soon | CNN Business (2024)

Wall Street finished in the red Wednesday after the Federal Reserve signaled interest rate hikes in the next couple of years.

The central bank’s median projections put the federal funds rate at 0.6% in 2023, up from near zero now. Higher interest rates are a net negative for stocks because they mean higher borrowing costs for companies, even though they would also come on the coattails of a stronger economy.

As suppliers scramble to get supply to meet incredible demand, could America solve its near-term inflation problem by accidentally creating a long-term deflation problem?

That’s what CNN Business’ Anneken Tappe asked Federal Reserve Chairman Jerome Powell. His answer: We’re not really worried about that right now.

“The problem now is that demand is very strong, incomes are high, people have money in the bank accounts. Demand for goods is extremely high, and it hasn’t come down,” Powell said. “But in terms of overcorrecting, there is a possibility on the other side of this that inflation could actually be quite low going forward. But that is not where our focus is right now.”

Powell said there’s no reason to expect prices will remain high for a long time — if prices keep soaring for travel, people will build new hotels, for example. But the timing of when prices come back in check remains uncertain, he said.

“We don’t in any way dismiss the chance that it can work out that this goes on longer than expected and the risk would be that over time, it does begin to affect inflation expectations,” Powell said. “If we see inflation moving up in a way that is really materially above what we would see as consistent with our goals, and persistently so, we wouldn’t hesitate to use our tools to address that. We do not expect that though.”

When the Federal Reserve Chairman is calling Wednesday’s meeting “the talking about talking about it meeting,” you know he’s trying to give a pacifier to Wall Street investors.

Investors weren’t exactly buying the baby talk. Stocks were down a bunch, although not as bad as you’d think after the Fed finally predicted higher rates in the future.

Still, Powell did everything he could not to be a wet blanket by saying that any rate increases are coming in the far, distant future (as in 2023, or maybe next year).

“Lift off is well into the future — the conditions for liftoff are far from maximum employment for example — it is a consideration for the future,” Powell said. “The near term thing is, that we learn from discussion that we will begin, is really about the path of asset purchases. As I mentioned, we had a discussion about that today. And we expect to in future meetings continue to think about our progress.”

It’s the economy, stupid.

The stock market might be freaking out about inflation today, but Federal Reserve Chairman Jerome Powell isn’t. It’s a normal function of the economic rebound, he says, and the data backs him up.

“If you look behind the headline numbers, the incoming data are consistent with the view that the prices that are driving that higher inflation are from categories that are being directly affected by the recovery — from the pandemic and reopening of the economy,” Powell said.

He noted that lumber prices spiked because of bottlenecks but have come back down, as expected. That’s true of other categories, with the notable exception of used cars — which are accounting for one third of inflation. But Powell said used car prices are soaring for reasons outside of the Fed’s control.

“Used car prices are going up because of a perfect storm of strong demand and limited supply. It is going up at an amazing annual rate,” Powell said. “But we do think it makes sense that that would stop and in fact it would reverse over time. We think we will be seeing some of that. When we will be seeing it we are not sure.”

Although Federal Reserve Chairman Jerome Powell believes the job market will be “very strong” in a year or two, he acknowledged that the unusual circ*mstances surrounding the pandemic and economic rebound are adding uncertainty for employers and workers alike.

A few things are holding back jobs growth:

“You put all those together, I would expect that we would see strong job creation, building up over the summer and going into the fall,” Powell said. “This is an extraordinarily unusual time, and we really don’t have a template or any experience of a situation like this, so I think we have to be humble about our ability to understand the data.”

The American labor market is still kinda weird – businesses want to hire, but workers don’t necessarily want to go back to work just yet, leading to a labor shortage in some industries.

But Federal Reserve Chairman Jerome Powell believes we’re a year or two away from returning to the jobs boom that was taking place just before the pandemic.

“If you look at the labor market and look at the demand for workers and level of job creation and think ahead, it’s clear, and I’m confident that we are on a path to a very strong labor market – a labor market that shows low unemployment, high participation, rising wages for people across the spectrum,” Powell said. “I have no reason to think that that won’t happen again.”

The Dow fell 300 points and the S&P 500 and Nasdaq both fell 0.8% after the Fed suggested it would raise rates sooner than expected.

Stocks had been plodding along for the past several weeks in anticipation of Wednesday’s Fed update. Investors had been mostly complacent, even as multiple inflation reports showed prices were rising more than expected. Still, investors expected the Fed to largely stay the course and keep rates near rock-bottom.

To Wall Street’s credit, that’s pretty much what the Fed did. Rates are still zero, and most Fed governors expect rates to stay near zero throughout all of 2022. But a little less than half of Fed policymakers anticipate a rate hike next year, and most expect rates to start rising in 2023 — earlier than the Fed had previously predicted.

That’s potentially bad news for stocks down the road, as higher rates could eat into corporate bottom lines, ending the easy money policy of the past 15 months.

The Federal Reserve is finally acknowledging the inflation elephant in the room.

Fed officials now expect their preferred gauge of inflation to climb by a brisk 3.4% during the fourth quarter of this year, according to new economic projections released Wednesday.

That’s up sharply from a projection in March for inflation to rise by a gentler 2.4%. And it’s well above the Fed’s 2% goal.

However, the Fed is still signaling confidence this burst of inflation will pass. The median Fed official expects inflation to ease to just 2.1% in 2022, up just slightly from the March projection. Forecasts for 2023 inflation barely budged higher.

In its policy statement, the Fed again noted that “inflation has risen,” but stressed this “largely” reflects transitory factors.

The Federal Reserve expects to raise rates in 2023, far sooner than it previously believed as inflation continues to spike.

In its so-called dot-plot of predictions, Fed governors expect that the federal funds rate, which is currently near zero, will rise to about 0.6% by 2023. In the previous dot-plot in March, the Fed projected it wouldn’t raise rates until 2024 at the earliest.

Forcing the Fed’s hand is a combination of a stronger economy and rising inflation. The Fed sharply boosted its estimates for both – predicting a 7% rise in America’s gross domestic product this year, up from its previous estimate of 6.5%. But it also expects prices to grow 3.4% this year, up from 2.4% in its prior estimate.

It’s just under an hour until the Federal Reserve publishes its latest monetary policy update. Analysts are already chiming in on what it might say:

“They’re going to have to acknowledge in their statement that inflation has been running a bit hotter than expected,” said David Kelly, chief global strategist at JPMorgan (JPM) Asset Management.

The Fed also will likely continue to argue that inflation is mostly transitory, he added.

But considering both strong economic growth and bigger-than-expected price spikes, “I do expect them to put one rate increase in their forecast for 2023,” Kelly said.

And that, on its own, will be a sign that the Fed is ready to focus on a post-pandemic world.

Web hosting company GoDaddy (GDDY) has seen record growth during the pandemic as small businesses moved online.

So what’s the current situation?

“We see services businesses doing better, businesses like photography or wellness,” he added.

The company also has launched GoDaddy Payments, which allows customers to integrate their payment solutions with their website.

“Customers should have a choice, but so far, a majority of customers are picking the GoDaddy solution,” Bhutani said.

Inflation measures show that prices are rising even though some raw material prices are coming back down.

This puts the Federal Reserve in an awkward spot, Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence, told Alison Kosik on the CNN Business digital live show Markets Now.

“I think the Fed is likely grappling with the fact that we’ve seen commodity prices come down… so that is working in favor of the transitory narrative,” she said, but rental inflation is heating up at the same time, which could have a lasting affect.

The housing market has its own woes: too little new supply as prices and rents are soaring.

But there’s an opportunity for the Fed in this: The central bank could say that its quantitative easing – specifically the purchasing of mortgage-backed securities – is “doing more harm than good in the housing market,” DiMartino Booth said, and could move to end the purchases.

The Fed’s policy decision is due at 2pm ET, with a press conference scheduled for 2:30pm ET.

Treasury Secretary Janet Yellen told lawmakers Wednesday the federal government does not know how ultra-sensitive tax documents from some of the world’s richest people was leaked to the public.

“We’re only one week out on this. And I really want to emphasize: We do not know what happened. We don’t have any facts at this point,” Yellen said during a Senate hearing.

Yellen said Treasury officials have referred the incident to the department’s inspector general as well as the Justice Department.

“This was a very serious situation, and I and the Treasury Department take very seriously the protection of government data,” Yellen said.

Her comments come after ProPublica reported on a never-before-seen trove of IRS records detailing the finances of Jeff Bezos, Elon Musk, Warren Buffett and other billionaires. The report revealed how some of the world’s richest people have legally avoided paying income tax.

“If there are any actions we need to take to shore up the protection of this information, you have my absolute word that we will do so,” Yellen said.

Republican Senator John Thune warned the IRS leak could have serious repercussions.

“This targeted attack on a select few Americans undermines the confidence in the agency that goes to the heart of the trust between taxpayers and the IRS’ ability to safeguard private information,” Thune said.

Wall Street continues to be mixed with only the Nasdaq Composite in the green at midday.

The Dow and the S&P 500 are flat and the Nasdaq is up 0.1%.

Investors are sitting on their hands until Federal Reserve Chairman Jerome Powell starts talking at 2pm ET. The central bank has been saying that it won’t change its policy stance just yet and that the spike in inflation is only transitory.

A big question for many businesses as the economy recovers is where are the workers? One answer: they may be starting their own business.

Americans in 2021 are starting businesses are a record rate. As of May, 2.5 million new business applications have been filed for this year alone, not adjusted for seasonal swings, according to the Census Bureau. In just 5 months, that’s already more than half of the businesses formed in 2020 – a banner year for growth. Americans started 4.4 million new businesses in 2020, a stunning 24% jump from the year before and the biggest increase on record.

Some of these entrepreneurs lost jobs during the pandemic, according to a report by Peterson Institute for International Economics looking at the unprecedented business formation.

“Higher local unemployment rates predict increases in U.S. entrepreneurship during past downturns,” the report said. “The more limited opportunities in the wage sector may have incentivized entrepreneurship by necessity.”

Others likely took advantage of the billions in government stimulus for both U.S. households and businesses. Even though no direct legislation directly supported new business formation, a May study looking at data at the state level found that the implementation of relief packages directly boosted start-up formation rates.

Many Americans starting these businesses also likely saw a niche to fill during the pandemic. According to the Census data, some of the strongest growth has been in sectors like retail, transportation and warehousing, construction, and real estate.

Treasury Secretary Janet Yellen told lawmakers on Wednesday that the Biden administration is not dismissing the resurgence of inflation as the US economy reopens from the pandemic.

“We’re monitoring inflation very carefully and do take it very seriously,” Yellen said during a Senate hearing on the Biden budget. “No one wants to return to the bad high inflation days of the ’70s.”

Yellen was responding to criticism from Republican Senator Chuck Grassley, who said he’s very troubled by the Treasury secretary’s “nonchalant” approach to inflation.

“As we know from the 1970s, once inflation takes off, getting it back under control can require very painful measures,” Grassley said. “The early 1980s proved that.”

The Volcker-led Fed was able to tame inflation only by raising interest rates so aggressively that it tanked the US economy.

Yellen stressed that prices should cool off soon.

“The current burst of inflation we’re seeing reflects the difficulty of reopening an economy that’s been shut down, seeing huge swings in spending patterns and is experiencing bottlenecks,” Yellen said.

She added that the Biden administration is taking steps to deal with bottlenecks and defended the president’s budget as “fiscally responsible.”

US stocks were modestly higher early Wednesday ahead of the Federal Reserve’s monetary policy update.

Investors will focus on whether the central bank will change its tone on inflation after recent reports on key price indexes showed that inflationary pressures are alive and well.

A few minutes into the trading day, only the Nasdaq remains in the green, with the other two indexes having pared their gains.

In this morning’s economic data, housing starts and building permits for May fell just short of analyst expectations.

Building permits came in at 1.7 million, about 50,000 below the consensus. Similarly, housing starts stood at 1.6 million, about 60,000 lower than analysts polled by Refinitiv expected.

Stocks are mixed ahead of the Federal Reserve’s monetary policy update.

Wall Street expects the Fed to keep rates near zero, but it will closely examine every word of the Fed’s statement at 2 pm ET and Chairman Jerome Powell’s press conference at 2:30 pm ET for signs that the Fed is easing its foot off the stimulus gas. Some investors expect the Fed to signal interest rates could rise sooner than expected to help combat inflation.

On Tuesday, all three major indexes finished in the red, just one day after the S&P 500 and the Nasdaq Composite both reached new all-time highs.

Here’s where things stand as of 6:45 am ET:

JPMorgan Chase (JPM) is throwing its considerable weight behind efforts to root out racial bias in the appraisal of homes in America.

As part of a new bank-wide commitment to fight housinginequality,JPMorganis for the first time outlining specific legislation that can fightappraisal bias, backing the study of innovative ways to value homes and promoting efforts toboost sorely needed diversity in the appraisal industry.

Beyond appraisals, America’s biggest bank is promising to ease obstacles that make it harder for Black and Latinx households to buy homes, build wealth and access affordable housing.

Read more here.

US officials are seeking a $25 million fine from Air Canada, accusing the airline of failing to provide timely refunds to more than 5,000 passengers during thecoronavirus pandemic.

The formal complaint is the first enforcement action that the Department of Transportation has announced against an airline since the pandemic upended the travel industry in the spring of 2020. Air Canada said it would dispute the allegations and believes the DOT argument “has no merit.”

Read more here.