government bonds have also rallied after their first-quarter selloff, with the benchmark 10-year Treasury yield, which moves inversely to prices, recently at 1.46%, some 30 basis points below its first quarter highs. Stocks have climbed steadily in recent weeks and now stand at fresh records, extending a rally that has seen the S&P 500 gain 13% this year and nearly 90% from its March 2020 low. This story was originally featured on Fortune.NEW YORK (Reuters) -Investors will be zeroing in on the Federal Reserve’s monetary policy meeting next week as a "Goldilocks" market environment that has helped lift stocks to record highs and tamed a bond selloff is tested by rising inflation. “But again, I don't think it's going to end tomorrow, because we still have at least two to three months' worth of very good data ahead…so it could be an even bigger bear market rally than most people think.” “I think ultimately, this will be a bear market trap,” she said. And frankly, I don't think a 4% unemployment is high enough,” she said, adding that the Fed may be forced to push the unemployment rate toward 6% or 7% to truly defeat inflation.įor investors, that means the current rally in stocks is a “bear market trap,” but investment returns over the next few months could be better than expected. “I think that in order to get that sticky component of inflation down, they have to create slack in the labor market, they really have to push up the unemployment rate. Markowska said the Fed will be forced to raise interest rates to a point where unemployment rises significantly in 2023 if it hopes to reduce core inflation to near its target level. Until that impact kicks in, and corporate profit margins take a big hit, a U.S. Markowska also said the recent drop in commodity prices and inflation expectations isn’t a result of the Fed’s interest rate hikes, as central bank policies usually require some time to impact the economy. But I don't think it's right around the corner.” “It will be the price that we'll have to pay, at some point, to get back to 2% inflation. “I don't buy this idea that a recession is imminent, but I do think a recession is inevitable,” she said. economy will see a recession as the Fed continues its fight against sticky core inflation, just not anytime soon. In an interview with Fortune, Markowska also warned that the U.S. “We expect these two forces to put a floor under core CPI around 4%.” “We believe there is a persistent component to inflation from housing and labor shortages, which will not be resolved soon,” she said. Even as airfare and used car prices-which drove inflation during the pandemic-begin to decline, Markowska says there are forces that will keep core inflation above the Fed’s 2% target rate for some time. Still, she noted that core inflation, which excludes volatile food and energy prices, will likely remain elevated into 2023. Markowska agrees that the Fed will be forced to continue raising rates, but said it won’t need to be as aggressive as many on Wall Street anticipate. And most economists expect the rate hikes will continue. The central bank has raised rates four times this year in an attempt to reduce elevated consumer prices, including an outsize 75-basis-point hike in July. inflation, meaning the Federal Reserve will be able to slow the pace of its aggressive interest rate hikes through the end of the year. Markowska went on to argue that this week’s CPI data will show that June was the peak for U.S. That would be quite the turnaround after GDP contracted in the first and second quarters, leaving many to question whether the U.S. That should “set the stage” for a rebound in consumer spending, causing real gross domestic product (GDP) to rise over 3% in the third quarter, she said.
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