The key indices of the US stock market – Dow Jones, NASDAQ, and S&P 500 – ended Friday without major changes and continue to be located near the recently reached local highs. We consider all the upward movement over the past few weeks as a correction within the framework of a stronger downward correction that lasted more than six months. Although the market has cheered up recently, we still believe that the general decline of the stock market is not yet complete. The fundamental background has recently ceased to be unambiguously negative but has become somewhat contradictory. For example, the GDP reports showed two consecutive serious cuts in the American economy, but at the same time, unemployment continues to decline, and the labor market is in excellent condition. The Fed is already raising the rate by 0.75% every month and a half, but inflation has been growing and continues to grow calmly, which, however, does not have critical consequences for households and businesses. There is a lot of talk about the recession, but in fact, Jerome Powell was right when he said that a recession is impossible in the absence of a recession in the labor market, without layoffs, without bankruptcies. Thus, we are even sympathetic to the phenomenon that the US stock market is growing. However, monetary policy is becoming tougher and tougher, which should provoke a fall in stocks and indices.
Last Friday, the Economic Club of Cleveland hosted a speech by the head of the Federal Reserve Bank of Cleveland, Loretta Meister. If you remember, a few weeks ago, we started talking about the fact that the rate of 3.25–3.5% is not enough for inflation to return to 2%. A little later, the chief "hawk" of the Fed, James Bullard, openly stated this. And last Friday, the same idea was voiced by Meister. She said that raising the rate above 4% would be necessary to reduce inflation. Meister also added that the Fed is ready to aggressively raise the key rate until it sees a significant slowdown in inflation. Only after the consumer price index shows a slowdown for several months in a row, will it be possible to talk about a softening of the monetary policy. Meister also noted that in September, the markets are not necessarily waiting for a rate increase of 0.75%. She recalled that Jerome Powell said at the last meeting that he was ready to raise the rate immediately by 1.00%, and she, in turn, allowed an increase of 0.5%. Everything will depend on the incoming data. Recall that an inflation report will be published in the States this week, which is unlikely to show a significant slowdown, but it can still be a starting point for a drop in the price growth rate. Thus, if the September report has time to come out before the Fed meeting and shows a serious decline, it will be possible to count on a rate increase of only 0.5%. But we believe the Fed will raise the rate by 0.75% for the third time.
