The Tell: Here are 3 reasons why Jefferies sees a policy rate above 4% through the end of 2023, and a resilient U.S. economy

by | Aug 29, 2022 | Stock Market

Stocks extended losses on Monday after Federal Reserve Chair Jerome Powell’s Jackson Hole speech on Friday indicated that the central bank plans to continue raising interest rates to tamp down on inflation, even if it results in “some pain” for U.S. households. While Powell’s blunt speech increased fears on Wall Street about the central bank’s potential tolerance for a recession, economists at Jefferies expect the American economy to remain strong even as the Fed pushes rates to 4% and keeps them there for the entire 2023. 

The Dow Jones Industrial Average
DJIA,
-0.57%
lost 51 points, or 0.2%, to 32,232 on Monday afternoon, after shedding more than 1,000 points on Friday and notching their worst day since May. The S&P 500
SPX,
-0.67%
was off 7 points, or 0.2%, to 4,051. The Nasdaq Composite
COMP,
-1.02%
declined 58 points, or 0.5%, to 12,083. See: Stocks headed for more pain as 3,900 becomes new line in the sand for the S&P 500, chart watchers say “We believe the Fed and continue to think they will push rates to 4% and keep them there for all of ’23,” wrote Aneta Markowska, chief economist, and Thomas Simons, money market economist at Jefferies in a Friday note. “We believe rates will be higher for longer because the economy will be stronger for longer.” “In our view, the risk of a recession over the next 6-9 months is much lower than perceived. To be clear, we do not believe in a soft landing scenario; we do think that the Fed will ultimately be forced to induce a recession in order to reduce wage growth and push inflation back to 2%,” said economists. “However, taking the economy down will be harder, and will take longer than expected.”  According to Jefferies, there are three narratives now driving recession expectations. Here are reasons why they disagree with all three.Margin expansion, positive cash flow in Q2 won’t trigger layoffs Many investors are worried that firms will respond to high inflation and productivity weakness in the first quarter by reducing headcount, but economists at Jefferies said companies, so far, were able to pass on those costs to consumers, and margins in the second quarter expanded quite significantly.  “Non-financial domestic profits, which drive future hiring and capex decisions, incre …

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