Judy: Wall Street has gone into
meltdown mode tonight over fears
of inlation and the possibility
that higher interest rates are
imminent.
The Dow Jones industrial average
lost
876 points today to close at
30,516, nearly 3%.
The NASDAQ fell 4.7%.
And the S&P 500 dropped nearly
4%.
It is now officially in a bear
market, down more than 20% from
its high in January.
The sell-off has been broad.
All three major indexes have
finished lower nearly every week
since mid-march.
And crypto-currencies have lost
nearly $2 trillion of their
value since November.
Some insights and perspective on
all of this now from economist
Julia Coronado.
She's the founder of her own
firm for economic analysis and a
former economist for the fed.
Welcome back to the newshour.
Telus, what are the forces
driving this plunge?
Julia: The catalyst really came
on Friday.
We got higher than expected
inflation readings, again.
One of the major gauges the fed
watches of consumers inflation
expectations rose to the highest
level since 2008.
The combination of those two
things really lead the markets
to start speculating the fed
would raise rates much faster
than it has already signaled.
And that has in turn her to
risky assets like stocks.
Judy: I think some people look
at this and they know, ok, the
fed will have to raise rates, to
an extent, to put the brakes on
this inflation.
People know that is going to
happen.
How are they watching this and
then worrying about it at the
same time?
Julia: We are really in
uncharted territory in terms of
what are the drivers of
inflation, how high will it go,
how long will it last.
That translates into uncertainty
about how high the fed will have
to raise interest rates.
How much they will need to take
the punch bowl away.
This was an incremental data
point that told us, they will
have to go further, faster.
And that is going to hurt all
kinds of centers.
It is already hurting housing.
Mortgage rates are poised to go
above 6%, the highest in a very
long time.
That is already starting to
dampen enthusiasm in home sales
and probably will eventually
hurt valuations to some extent.
That is the leading edge.
Obviously, stocks are feeling
the pinch too.
Judy: If the fed were to raise
rates in the next few days, say
three quarters of a point,
rather than half a point, which
had been expected, how much of a
difference could that make in
these markets?
Julia: It is a great question
because it is not just about --
we all know the fed is raising
rates.
We know the direction of travel
here.
It is not even really about
whether they go 50 basis points
or 75 basis points on Wednesday.
It is really, what does that
signal for the whole path?
Does that tell us that we might
see them raise rates much higher
than we previously thought?
I think that is the line of
thinking here.
Not only are they going to raise
rates 75 basis points on
Wednesday after signaling they
were going to go 50, that might
be followed by another 75 basis
point hike in July and maybe
even in September.
We are going to end up with
rates higher then we saw last --
during last expansion.
And we really don't know where
that stopping point is yet.
Judy: Julia Coronado, I have to
ask you, how much of this is
counterintuitive?
We look at other economic
indicators, the economy is still
growing, unemployment is at a
very low level, consumers are
still spending.
Square the circle, or however
you want to describe what you
are doing to explain it for us.
Julia: You are highlighting the
tensions we see in the data.
In some ways, this economy is
extremely strong.
We have a very strong labor
market.
Low unemployment.
Workers have been coming back to
the labor market.
We have been generating an
unprecedented number of jobs
every month consistently for
more than a year now.
In some ways, it is very strong,
in some senses, that leads the
fed to have greater confidence
that they can and should raise
interest rates higher, to cool
off the economy, and bring it
into better balance.
The strength and the resilience
of the job market and the
consumers has kept inflation
higher than it would otherwise
be.
We do need to bring that -- cool
that dynamic down a little bit
in order to bring inflation
down.
Judy: Finally, the dreaded r-wor
D.
Who and what determines whether
or not we end up in a recession?
Julia: Every recession is
different.
One thing that is the same with
every recession is that it
usually with job losses and
rising unemployment.
We are a long way from that.
We are still starting from a low
point on interest rates, and a
strong job market.
We have a long distance to
travel before we really are
looking at an imminent
recession.
Can the fed get this balance
right?
Can they nail what we call the
soft landing, where inflation
comes down without unemployment
rising significantly?
There is still some hope for
that.
It is just that landing strip
for the fed has gotten narrower
and narrower with each of these
inflation prints.
Judy: That helps us think about
what they are facing, even if we
are still full of questions.
Julia Coronado, thank you so
much.