Dow retreated 336, decliners over advancers 3-1 & NAZ slumped 195. The MLP index slid 1 to the 226s & the REIT index was off 6 to the 383s on threats of higher interest rates. Junk bond funds barely budged & Treasuries were sold, driving yields higher. Oil finished up about 1 to the 76s & gold continued to see selling, down 9 to 1817 (more on both below).
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Cleveland Federal Reserve Pres Loretta Mester said that interest rates likely need to keep moving higher to get inflation back to acceptable levels. Mester said she sees the central bank's benchmark interest rate having to rise above 5% & stay there for a while. The Fed funds rate, which sets the level that banks charge each other for overnight borrowing but spills over into many forms of consumer debt, is currently 4.5%-4.75%. “I see that we’re going to have to bring interest rates above 5%,” she added. “We’ll figure out how much above. That’s going to depend on how the economy evolves over time. But I do think we have to be somewhat above 5% and hold there for a time in order to get inflation on a sustainable downward path to 2%.” Mester made news recently when she revealed that she was among a small group of Fed officials who, at the Jan 31-Feb 1 Federal Open Market Committee, wanted a ½ percentage point rate hike rather than the ¼-point move the panel approved. Though she is a nonvoter this year on the rate-setting FOMC, she gets input into decisions. She said she's not sure yet whether she will push for a ½-point increase when the committee meets again in Mar. She thinks that if the economy does contract, it won't be a severe downturn & expressed hope that the Fed can achieve its goal without crushing a labor market that has been surprisingly resilient despite all the rate increases. “I do think that in this labor market, we can have both. We can have a healthy labor market and we can get back to price stability,” she said. “But I also think it’s really important to know that if we want to sustain healthy labor markets over time, we have to get back to price stability.” “I don’t prejudge,” she continued. “That’s a tactical decision that we make at the meeting.”
Fed’s Mester says she has hope that inflation can fall without a recession
The Federal Reserve is unlikely to be able to bring down inflation without having to raise interest rates considerably higher, causing a recession, according to a new research paper. Former Fed Governor Frederic Mishkin is among the authors of the white paper that examines the history of central bank efforts to create disinflation. Despite the sentiments of many current Fed officials that they can manage a “soft landing” while tackling high prices, the paper says that is unlikely to be the case. “We find no instance in which a central-[bank]induced disinflation occurred without a recession,” said the paper. The Fed has implemented a series of interest rate hikes in an effort to tame inflation that had been at its highest level in 41 years. Markets widely expect a few more hikes before the Fed can pause to assess the impact the tighter policy is having on the economy. However, the paper suggests that there's probably a ways to go. “Simulations of our baseline model suggest that the Fed will need to tighten policy significantly further to achieve its inflation objective by the end of 2025,” the researchers said. “Even assuming stable inflation expectations, our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2 percent target by the end of 2025 without a mild recession,” they added. The paper, however, rejects the idea of raising the 2% inflation standard. In addition, the researchers say the central bank should abandon its new policy framework adopted in Sep 2020. That change implemented “average inflation targeting,” allowing inflation to run hotter than normal in the interest of a more inclusive employment recovery. The researchers say the Fed should go back to its preemptive mode where it started raising rates when unemployment fell sharply. Fed Governor Philip Jefferson released a reply to the report, saying the current situation differs from previous inflation episodes. He noted that this Fed has more credibility as an inflation-fighter than some of its predecessors. “Unlike in the late 1960s and 1970s, the Federal Reserve is addressing the outbreak in inflation promptly and forcefully to maintain that credibility and to preserve the ‘well anchored’ property of long-term inflation expectations,” Jefferson added.
Fed can’t tame inflation without ‘significantly’ more hikes, causing a recession, paper says
The US the one-year anniversary of Russia's invasion of Ukraine by authorizing $2B in aid to Ukraine & ramping up sanctions & tariffs on Moscow in an effort to bolster Kyiv's war effort. Pres Biden & leaders of the Group of Seven leading world economies also met virtually with Ukrainian Pres Volodymyr Zelenskyy & agreed to remain united in supporting Ukraine as Russia's onslaught continues. The countries have taken a leading role in sending military & financial aid to Ukraine & attempting to hamper Russia’s economy to limit the strength of its assault. The G-7 leaders reiterated their stance that Russia provoked the war&Russia can end it. Until it does, the allies, which include the US, Canada, France, Germany, Italy, Japan & the UK, & non-enumerated member the EU, agreed to back Ukraine & place sanctions on Russia. “We call on Russia to stop its ongoing aggression and to immediately, completely and unconditionally withdraw its troops from the entire internationally recognized territory of Ukraine,” read a joint statement. Many key points in the statement remain unchanged from the group's previous stances. It underscored that Russia'/s attack on Ukraine was a violation of sovereignty & respect for human rights that ran afoul of the UN charter. Additionally, the group warned of “severe consequences” if Russia uses chemical, biological, radiological or nuclear weapons. The group reminded Russia of the decision made at the G-20 meeting in Bali, where all members, including Russia, agreed that using or threatening to use nuclear weapons is “inadmissible.” Earlier this week, Russia said it would be suspending its participation in the New START Treaty, the sole remaining nuclear agreement between it & the US. The G-7 leaders meeting came as the US & other allies of Ukraine used the one-year mark of the war to try to strengthen Ukraine's defense & chip away at Russia's economy.
U.S. announces $2 billion in aid for Ukraine a year after Russia’s invasion
Gold closed lower for a 5th-straight day as another report showed the US economy is still running hot, bolstering the Federal Reserve's case for more interest-rate hikes. Gold for Apr closed down $9 to $1817 per ounce, the lowest since Dec 28. The drop comes as the $ & bond yields surged after a US report showed the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation measure, rose by an annualized 5.4% in Jan, up from 5.3% in Dec & ahead of a 4.9% consensus estimate. The data is the latest to show the US economy remains robust even as the Fed raises rates to quell high inflation. The $ was sharply higher following the release, with the ICE $ index up 0.64 points to 105.23. Bond yields also climbed, with the US 10-year note up 7.5 basis points to 3.958%.
Gold Prices Fall for a Fifth Day as Another Robust Economic Report Shows the US Economy is running Hot
Oil futures edged higher, finding support as investors weighed the outlook for supply from Russia as production cuts kick in, while also gauging the outlook for Chinese demand. Oil futures edged higher, finding support as investors weighed the outlook for supply from Russia as production cuts kick in, while also gauging the outlook for Chinese demand. The US benchmark was trading nearly 18% below the level seen just ahead of Russia's invasion of Ukraine a year ago. West Texas Intermediate crude for Apr rose 27¢ to $75.66 a barrel, after snapping a 7-day losing streak yesterday. The US. benchmark was lower for a 1.2% weekly fall. Apl Brent, crude the global benchmark, rose 36¢ to $82.57 a barrel. May Brent the most actively traded contract, was up 39¢, at $82.34 a barrel. Crude has fallen as Russian supply has continued to flow into the market, though it plans to cut production by 500K barrels a day in Mar as it reacts to a further round of price caps & sanctions that were a further response to the invasion of Ukraine. At the same time, US crude inventories have continued to build, with domestic inventories rising by 7.6M barrels last week. However, 2 Russian companies have announced that they plan to reduce their exports in Mar, presumably due at least in part to low prices
Oil bounces, turning positive for week as traders eye cuts to Russian output and exports
Stocks began trading in the dumps & the bulls did not return. The Fed's current rate is at 4½% & heading for 5%, maybe higher. Its most recent peak was 5% in 2007 & prior to that was 6+% in 2001. Those levels did not last long. Today's investors have become addicted to low interest rates & fear elevated levels. For the week, Dow fell over 1000 to the low end of its recent trading range (see below). These are trying times for investors.
Dow Jones Industrials
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