But in April, Fed officials began to change their views, expressed in speeches and other public comments, on how quickly interest rates would have to rise to curb inflation, and Wall Street’s economic forecasts also changed. In the futures market, where traders are betting on how high interest rates they can reach, the prevailing view now is that the Fed’s base rate will rise to about 2 percent by July – something that seemed unimaginable even a month ago.
For that to happen, the central bank will have to raise its interest rate by half a percentage point at each of its next three meetings, and the fear is that such aggressive increases will cause an economic downturn, not just cool things down enough to slow inflation, but sustains economic growth.
“Every time the Fed spoke, the markets took it quite negatively,” said Saira Malik, chief investment officer at Nuveen, a global investment manager. “Investors are worried that with these multiple increases in interest rates, the Fed will cause a recession, not a soft landing.
Higher interest rates will affect consumer demand. Mortgage rates, for example, have already jumped to more than 5 percent from 3.2 percent earlier this year, eating away at the budgets of new home buyers. Other borrowing costs, from consumer loans to corporate debt, will rise as the Fed raises its base interest rate.
So far, many companies – from United Airlines to PepsiCo – are passing on rising costs and saying sales continue to grow.
Economists are wondering how long this will last.
“There will be a natural slowdown in costs, perhaps before interest rates rise as costs rise,” said Jean Boyvin, head of the BlackRock Investment Institute. “The central bank will have to monitor this very closely, because if this happens naturally and then you add interest rate increases, this is the way to reach a recession scenario.
Broadly speaking, earnings reports this week show that profit growth continues. About 80 percent of the companies in the S&P 500, which will report results by Thursday, did better than expected, according to data from FactSet.
But other companies have only contributed to the decline. Netflix collapsed after announcing last week that it expects to lose 200,000 subscribers in the first three months of the year and another two million in the current quarter. Shares fell more than 46% for the month.
Amazon fell 12 percent on Friday one day after the e-commerce giant reported its first quarterly loss since 2015, citing rising fuel and labor costs and warning that sales would slow. Its shares fell 22 percent this month.
General Electric warned on Tuesday that the economic consequences of Russia’s invasion of Ukraine would weigh on its results. Its shares fell 10 percent that day and fell about 16 percent for the month.
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