“The Fed is ready to risk a deeper recession”
The S&P 500 closed more than 1.0% higher on Friday even after the PCE price index – a favorite gauge of inflation the Fed hits a new forty-year high.
PCE price index jumps to 6.8% in June
A 6.8% year-on-year gain in June, according to the Bureau of Economic Analysis, was the largest since January 1982. Compared to the previous month, the index rose 1.0%.
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Reacting to CNBC’s “The Exchange” report, Diane Swonk (chief economist at KPMG) said the Fed should continue to tighten even if inflation starts to subside in the coming months.
Will it be cold enough not to become more rooted? The Fed wants to avoid that mistake of the 60s and 70s that gave us stagflation by not going far enough to detail inflation.
Core PCE (excluding food and energy) rose 4.8% year-on-year, beating Dow Jones estimates by 0.1%.
The Fed could continue raising rates until 2023
The US economy is now in a “technical” recession which adds to the ongoing debate over “rate cuts” by early 2023. Swonk, however, sees no such possibility.
I think the Fed is going to raise rates through 2023 and then hold them back to see how far it takes them. If they need to go further, they will go further. This is a Fed that is willing to risk a deeper recession.
Earlier this week, Chairman Jerome Powell raised rates by 75 basis points and signaled that another hike of this magnitude in September remains on the table as the labor market continues to be “tight”.
Nonetheless, US stocks are now up more than 10% from their year-to-date low.
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