The Fed remains in an extremely challenging position. While Jerome Powell raised the Fed Fund rates by 0.75% today, to 1.5-1.75%, it's still woefully below the underlying inflation of nearly 9%.
So what is the Fed going to do?
First, the Fed NEEDS to get inflation under control because "it's very painful for people."
This makes sense: As inflation has outpaced wage growth, real purchasing power has declined!
As consumers can afford less goods and services, sentiment drops and societal unrest increases. This also increases the odds that employees will increasingly need to ask for higher wages, creating an inflationary spiral effect.
The second reason the Fed is in a very tough spot is because much of the current inflationary outlook is attributable to supply constraints (oil, food) that the Fed has very limited control over.
This is the set up for STAGFLATION.
The Fed raises rates to temper demand, which hurts the economy, but...
Walmart stock and Target stock are collapsing in response to higher inflationary pressures.
Could this mean we're entering an imminent RECESSION? Why is HIGH INFLATION so bad for stocks?
First, as food & oil prices sky-rocket, consumers are increasingly being forced to choose between what they NEED and what they WANT. This is putting pressure on HIGHER MARGIN, NON-ESSENTIAL goods. Target and Walmart won't be the only companies facing this challenge.
But are we in a RECESSION?
So far Walmart & Target are NOT seeing a recession as store traffic and purchases are still growing. So why are their stocks dropping?
Walmart and Target have seen their profit margins COLLAPSE as they haven't raised prices enough to keep up with rising labor, shipping costs, and materials costs. In the 1Q 2022 Target's...