The key indices of the US stock market – Dow Jones, NASDAQ, and S&P 500 – have resumed their growth, and this movement already raises many questions. Recall that US stock indices have been growing for several weeks and even updated their previous local highs, recovering by 40-50% after falling in recent months. If the Fed had announced at least that it was reducing the pace of raising the key rate, we would not have been surprised by such a move. If the geopolitical situation in the world were improving and not heating up, we would not be surprised at this development of events. But the real picture looks the opposite. Geopolitics is getting worse daily, and new hot spots are appearing on the world's geopolitical map. The Fed will not slow the pace of monetary policy tightening, and it is ready to maintain the current pace since inflation has not yet closed a single month with a decline. Of course, the Fed cannot raise the rate forever. It is already 2.5%, and the maximum rate level is considered 3.5-4.0%. If the rate is raised again by 0.75% at the next meeting, the Fed will be able to raise the rate by 0.25% once or twice, and the entire tightening cycle will be completed. Nevertheless, investment conditions continue to deteriorate, so it is very strange to see how stocks and stock indices are growing. Especially against the background of the impending recession and the continuing QT program, according to which up to $ 100 billion will be withdrawn from the economy every month from September 1.
Meanwhile, Thomas Barkin, one of the members of the Fed's Board of Governors, said that inflation is declining due to the leveling of demand. He probably means the baseline, which has stopped growing. However, the main indicator continues to be located at the maximum values for 40 years, and we would not say at this time that inflation is slowing down. Barkin also said inflation would not decrease immediately, and the Fed is unlikely to receive help from establishing supply chains or other global events. He also noted that the US economy is not in danger of a recession, and at the moment, there is only a slight slowdown in GDP growth since a recession is impossible when 400,000 new jobs are created monthly (Nonfarm Payrolls). In light of this statement and earlier statements by Powell and Yellen, Friday's Nonfarm report becomes an even more important event than before. Recent reports have indeed demonstrated the strength of the US labor market, but what if Nonfarms start to decline? What will the Fed members say then? How will the US stock market move? Despite the strong upward correction, we still believe that the downtrend is still far from ending.