The brightening mood reflects a belief the central bank will not escalate an already-aggressive plan to raise interest rates to tamp down blazing hot inflation. After the Bureau of Labor Statistics released data last week showing inflation was 9.1 percent higher in June than it was a year ago, many market observers worried the Fed might choose to raise rates by a full percentage point, or 100 basis points, at its July 27-28 meeting instead of the widely anticipated 0.75 percentage point.
An increase of 100 basis points would be a major leap, because the Fed has not bumped up rates by that much since the early 1990s. It would also show a clear ramping up from earlier this year, fueling the Fed’s critics who have argued that officials acted too slowly to address surging price hikes, and are only now fighting inflation from behind.
Mixed messages on economy raise questions on recession risks
But the criticism and rate-hike trajectory reflect the Fed’s delicate balancing act. While the rate increases are designed to cool the economy, they could also tip it into a recession, by slowing economic activity too forcefully and with too much speed. As Fed officials have acknowledged, the need to bring stability to prices may come at the cost of sluggish growth and layoffs.
Central bankers have already raised rates three times this year: a quarter-point in March, a half-point in May and three-quarter of a point in June, catching some on Wall Street by surprise.
The latest monthly jobs report showed the U.S. labor market maintained its sizzling pace in June, keeping the unemployment rate at a low 3.6 percent. What’s more, corporate earnings and consumer spending have remained resilient, highlighting the conflicting signals that officials and analysts are parsing to get a sense of where the economy is headed.
Volatility could be elevated this week as Wall Street turns its attention to corporate earnings.
On Monday, Goldman Sachs reported better-than-expected quarterly results ahead of the opening bell. Though revenue fell 23 percent, to $11.86 billion, it was $1 billion more than analyst estimates thanks to a 55 percent surge in fixed income revenue, including government and corporate bonds. Profit slumped 48 percent to $2.79 billion as a result of an industry-wide decline in investment banking activities. Goldman shares climbed 3.6 percent
Bank of America, meanwhile, reported a 5.6 percent jump in revenue, to $22.79 billion vs. forecasts of $22.67 billion. The bank benefited from rising interest rates, pushing net interest income up 22 percent. But profit declined 32 percent to $6.25 billion in the second quarter. Shares fell 1 percent.
Results roll in from Charles Schwab and IBM later Monday, and from Netflix, Johnson & Johnson, Tesla, Twitter and a host of other companies in the coming days.
June inflation soared 9.1%, a new 40-year high, amid spiking gas prices
Elevated fuel costs are also weighing heavily on corporate America. Delta, the first major airline to report second-quarter earnings posted a quarterly profit as travelers shelled out for higher airfare. Fuel prices for Delta rose 37 percent, compared with the prior three-month period. The airline said it has hired 18,000 employees since the start of 2021, bringing its staffing to 95 percent of its pre-pandemic level. Even with the boosted hiring, however, passengers are dealing with widespread flight cancellations. American Airlines and United Airlines report earnings later this week and Southwest posts at the end of the month.
The global economic outlook has worried investors with signs of recession amid rising inflation, putting central banks under the spotlight. The European Central Bank is set to meet Thursday as the euro zone reels from high inflation, a brewing energy crisis and other fallouts from the Russian invasion of Ukraine. The bank is expected to raise interest rates for the first time in 11 years.
Some economic data show signs of slowing, especially in the once-red hot housing market, reflecting the consequences of higher interest rates, which make loans more expensive for businesses and consumers.
Soaring dollar could help Fed in fight against inflation
Confidence among builders of single-family homes plunged this month, according to a new survey. The National Association of Home Builders/Wells Fargo Housing Market Index, a monthly glimpse of market conditions, showed that sentiment fell to levels not seen since the first summer of the pandemic, when the public health crisis gripped the national economy. Home builder confidence fell by 12 points compared with June’s figures, and follows a sinking trajectory that began in March, when the Fed began to increase interest rates.
The cooling housing market reflects broader changes in the economy as policymakers work to pull inflation under control. Near-zero interest rates in 2020 and 2021 helped fuel the housing market boom and coincided with record shattering gains on Wall Street.
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