As already mentioned, yesterday, the US stock market fell again. This could have been caused by the general fundamental background, which suggests a strong and prolonged tightening of the Fed's monetary policy, or perhaps with today's report on inflation in the United States, which is now the main indicator of the regulator's future actions. Recall that by the end of February, the consumer price index in the United States rose to 7.9% y/y. And do you remember six months ago, Christine Lagarde and Jerome Powell unanimously declared that this was a "temporary phenomenon"? As practice shows, the concept of "temporary" varies greatly between the heads of central banks and market participants. One way or another, the next inflation report for March will be released today. Although the Fed has already raised the rate once and has fully completed the QE program, according to experts, the consumer price index will continue to grow. A value of 8.5% is forecast for March. At this rate, in a couple of months, we may see 10% inflation. Such a value can cause a new fall in the stock market, as well as a new rise in the dollar against its competitors. The logic here is simple: the higher the inflation, the more stringent the Fed's measures to contain it will be. And there can be no other way since the Federal Reserve openly called the fight against inflation "the number one goal." In the case of the dollar, the market reaction may not be so pronounced, but stock indices will have to react with a fall only if inflation does not fall below the forecast value, which may mean a slowdown in its growth rate. But even in this case, the Fed clearly will not abandon its plans, since inflation has already climbed too high in any case.
At the same time, Reuters surveyed economists. Its results showed that 85 out of 102 economists surveyed believe that the rate will be increased by 0.5% in May. 56 out of 102 believe that the Fed will add another 0.5% in June. In this regard, many expect the beginning of a recession in the United States in the next year or two. It can be caused precisely by high inflation and a strong tightening of monetary policy, which will hit demand, production, and supplies. The mechanism is quite simple. The lower the rates, the more unprofitable it is for investors to invest their assets in safe instruments, such as bonds and deposits. Therefore, they buy shares, which is a process of investing in the economy, since companies can expand their production due to these revenues. If rates rise, then capital flows from the stock market to the bond market and bank deposits. Therefore, investment flows into the economy are decreasing, lending is becoming more expensive and the economy is "cooling down". In the coming months, we would not expect a strong inflow of money into deposits and bonds, since inflation is now several times higher than the yield of these instruments. However, as it falls, the demand for safe assets will grow. In the United States, they believe that before inflation returns to 2%, the economy can easily slide into recession.
