Fed Rate Hikes Could Lead to Recession in Late 2023
The Federal Reserve (Fed) has continued to signal that it will stick to its rate-hiking cycle, despite the recent fall of inflation and the weakening of leading economic indicators. This has investors concerned about the potential for a recession in late 2023, as the risk for second-half 2023 corporate profits is now skewed to the downside.
The consumer-price index decreased by 0.1% in December, marking the sixth consecutive month of declining inflation. This has caused many to anticipate a soft landing that would lead to a pause in Fed rate increases. Consequently, the S&P 500 and Nasdaq both rose between January 2 and January 27, as investors seemed to have knowledge that the Fed did not.
The Fed is determined to drive down wages and bring inflation down to its target. However, this could be difficult to achieve as labor market tightness could result in rising wages. This could lead to a decrease in corporate profits and margins, and potentially a recession in the late 2023. Investors should be wary of these risks and be prepared for potential losses in the stock market.
0. “Markets Are Expecting a Miracle from the Fed: A Pivot and a Soft Landing” Barron's, 13 Feb. 2023, https://www.barrons.com/articles/fed-pivot-rates-markets-soft-landing-b623899a
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