July 21, 2024

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Why Investors Don’t Believe the Fed

2 min read

The bull market rally is continuing to run on Thursday. The S&P 500 is poised to set yet another record, as investors see inflation in retreat — even if Fed policymakers don’t quite see it that way.

The gulf between investors and the central bank is widening again. After Wednesday’s tepid Consumer Price Index report, the odds in the futures market have risen for two interest rate cuts this year, a prospect that has triggered a stocks-and-bonds buying spree.

Not so fast? The Fed’s “dot plot” projection released Wednesday sees just one cut this year, down from its previous forecast of three, as policymakers worry that inflation remains above their comfort levels. That makes the Fed more hawkish than other central banks, especially those in Europe, that are expected to trim borrowing costs several times this year. The White House has largely abandoned hopes for something similar.

Jay Powell, the Fed chair, tried to tamp down expectations at Wednesday’s news conference. He reiterated that inflation remained above the central bank’s 2 percent target and that U.S. households’ spending power had diminished over the past two years. He added that a premature cut “could end up undoing a lot of the good that we’ve done.”

Market watchers aren’t buying it. Wednesday’s C.P.I. showed that consumer prices in May rose by their lowest level in three years. Given that, the Fed’s forecast for a single cut “seems like an overly gloomy view on inflation progress,” Charlie Ripley, an investment strategist at Allianz Investment Management, wrote in a client note.

Bullish sentiment is dominating the markets. The S&P 500 has climbed nearly 14 percent this year, far outperforming what Wall Street analysts had expected at the start of 2024, even as more companies are reporting a slowdown in consumer spending.

Here are economists’ big takeaways from Wednesday’s C.P.I. and Fed reports:

  • A positive sign was that the headline…

Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch, Ephrat Livni, Benjamin Mullin and Vivienne Walt

2024-06-13 07:09:08

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