How have US stocks reacted to rate bets, statements by Fed officials?”

On Thursday, US stocks experienced significant losses after profit-taking triggered by the desire to benefit from the recent gains they had achieved over the past few days. This came in the wake of increasing expectations of an interest rate cut by the Fed in September. The recent surge in stock market indices was ignited by a series of statements from monetary policymakers within the Fed. These statements suggested a growing conviction among central bank board members that inflation is continuing to decline toward the bank’s target of 2.00%, a trend observed over several months.

Several Fed officials have given key statements from the beginning of this week until Thursday, which led Wall Street investors to rush to buy more stocks, and the intense purchases were behind sharp rises and large gains for American stocks, which led to profit-taking operations. To take advantage of those gains.

“Quantitative easing on the horizon” – Fed statements

Adriana Kugler, a member of the Fed Board of Governors suggested that it would be appropriate to begin quantitative easing later this year if conditions move in the right direction. Kugler also emphasized that risks related to inflation and job growth have become more balanced recently, signaling a potential need for interest rate cuts. Despite this, she also acknowledged that maintaining the current interest rate for some time might be prudent.

Closer to rate cuts

Christopher Waller, another Fed Board member, stated on Wednesday that the time for interest rate cuts is approaching. He based this on various possible scenarios available at the moment. The optimistic scenario includes further inflation developments and positive data, suggesting that interest rate cuts won’t be too far off. However, Waller also mentioned a second scenario, which seems more likely. In this scenario, inflation stops rising and continues to show progress, making interest rate cuts less certain.

The third scenario, albeit unlikely, involves a significant surge in inflation rates in the second half of this year. However, Waller indicated that the central bank “is approaching the time when interest rate cuts are a confirmed measure. He also suggested that current data aligns with the concept of flexible easing, although it falls short of being a substitute for that in light of the unemployment rate. Furthermore, Waller stated that the latest batch of inflation data has made him ‘more confident in the Fed’s path toward achieving the inflation target.’” Waller believes that the Fed is getting closer to implementing interest rate cuts.

The current data supports the idea of gradual easing, but it doesn’t fully replace other factors, especially considering the unemployment rate. Waller’s confidence in the Fed’s ability to achieve its inflation target has grown due to recent inflation data.

Waller emphasized that the Fed still “needs more evidence that the decline reflected in the latest personal consumption expenditure indicators will be sustainable in the coming period. He expects consumption growth to be moderate in the second half of this year, given the stability shown by personal income data.”

Waller highlighted the need for additional evidence regarding the sustainability of the recent decline in personal consumption expenditure indicators. He anticipates that consumption growth will be moderate in the latter part of this year, considering the income stability observed.

Waller pointed out a ‘real balance’ between supply and demand in the labour market. He suggested that the risk of rising unemployment rates has increased compared to a long time ago. He added that wage growth continues to decline but now aligns with the necessary rate to support inflation’s sustainable path toward 2.00%.” Waller acknowledges a balance between labour supply and demand. He believes that the risk of higher unemployment rates has become more pronounced than in the past. Despite this, wage growth is consistent with the desired rate to sustain inflation at 2.00%.

Austin Goolsbee, a member of the Fed Board, stated on Thursday: ‘I feel significant improvement in consumer price index readings over the past few months.’ He confirmed that inflation has made significant progress in the downward direction over the last 12-18 months. Goolsbee added, ‘This decline in inflation has been the fastest ever. Although we haven’t reached the central bank’s target yet, the trajectory makes me more comfortable when I see components like housing prices decreasing. Goolsbee expresses optimism about recent consumer price index data. Inflation has decreased significantly over the past 12-18 months, although it hasn’t fully reached the central bank’s target.

The rapid decline in inflation provides comfort, especially when observing price components like housing costs. Goolsbee affirmed that the US labour market conditions are moving closer to a better balance. However, he emphasized that we haven’t entered a recessionary state in the job market yet. Nonetheless, warning signs have emerged recently. If we witness a sharp increase in unemployment rates, it would be reasonable to be concerned about unemployment levels. However, as of now, that doesn’t seem to be the case. He also noted that the unemployment rate should remain stable, and we shouldn’t rush to anticipate decisions in upcoming Fed meetings. ‘We still have plenty of data to consider,’ he added. Moreover, he highlighted that the closer we get to achieving the 2.00% inflation target, the more months of similar data we see.” Goolsbee acknowledges progress toward a balanced labour market.

Despite warning signs, the US job market hasn’t entered a recession. If unemployment rates spike sharply, concern would be justified, but currently, that’s not the situation. Goolsbee advises patience, emphasizing that there’s ample data to analyze. As we approach the 2.00% inflation target, consistent data becomes increasingly important.

Price action

US stocks have been declining since the beginning of trading on Wall Street, after more than one blow to the technology sector stocks due to possible American decisions regarding trade relations with China, in addition to profit-taking operations to take advantage of the large gains achieved by the sector in the past few days.

The Dow Jones Industrial Average fell to 40,665 points after losing about 533 points, or 1.3%. The Standard & Poor’s 500 fell to 5,544 points after a loss of about 44 points, or 0.8%. The Nasdaq heavy technology index fell to 17,871 points, after losing about 125 points, or 0.7%.

The shares of electronic chip companies listed on the New York Stock Exchange indices declined amid a wave of decline sweeping the shares of this sector that began last Wednesday after Washington announced that it was considering placing more trade restrictions on this industry as a continuation of its campaign against China.

Expectations of a rate cut next September increased after a series of statements were issued from the Fed’s corridors, carrying a great deal of confidence that US inflation is heading to the central bank’s target of 2.00%. These expectations were behind the significant rises achieved by global stocks in the past few days, which led investors to intense selling operations aimed at reaping profits, and then stocks collapsed on Wall Street at the end of Thursday’s session.