The Fed has raised rates at a furious pace over the last year in hopes of undercutting high inflation. Higher rates can do that, but only by bluntly slowing the entire economy in one fell swoop. That raises the risk of a recession in the future and drags down prices for stocks, bonds and other investments.
Traders are betting on a roughly 70 per cent probability the Fed will raise its key overnight interest rate in May by 0.25 percentage points to a range of 5 per cent to 5.25 per cent, according to data from CME Group. A day before Friday’s jobs report, they saw a roughly coin flip’s chance that the Fed would stand pat at its next meeting.
The Fed has jacked up rates at every one of its meetings over the past year, forcing them up from near zero at the start of 2022.
While the jobs report raised expectations for another rate hike, it also showed a steady-enough labour market to bolster hopes among some investors that the Fed could pull off what’s called a “soft landing” for the economy. That’s where the Fed succeeds in raising rates just enough to stifle inflation but not so much as to create a severe recession.
Hopes for a soft landing helped support stocks whose profits tend to be most closely tied with the strength of the economy. Stocks of energy producers in the S&P 500 rose 0.8 per cent, for example, tied for the highest among the 11 sectors that make up the index. Industrial companies were also rising, including a 3 per cent gain for Caterpillar.
The overriding bet within the bond market, though, seems to be that the economy will weaken so much that the Federal Reserve will have to cut rates as soon as this summer.
Lower rates can relax the pressure on the economy and financial markets, but it also could give inflation more room to run. The Fed has so far said it sees no rate cuts happening this year.
Another report due on Wednesday could have a bigger impact on expectations for the Fed. That’s when the US government will release its latest monthly update on prices across the economy at the consumer level. Economists expect it to show inflation slowed last month but remains well above the Fed’s target.
Also this week, earnings reporting season will begin for the biggest US companies. Delta Air Lines, JPMorgan Chase and UnitedHealth Group will be among the first S&P 500 companies to tell investors how much profit they made during the first three months of the year.
Expectations are low, and analysts are forecasting the sharpest drop in earnings per share since the pandemic pummelled the economy in the spring of 2020.
In the bond market, Treasury yields were relatively stable after rising Friday in an abbreviated trading session following the US jobs report. The 10-year yield, which helps set rates for mortgages and other important loans, was holding steady at 3.41 per cent.
With AP, Bloomberg
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