The Fed is on a mission to bring down the economy

It’ll get worse before it gets better. That’s the expectation that Fed Chair Jerome Powell set last Friday in a speech that sent markets on their worst 5-day streak since June.

What’s the big deal? In the past month, a better-than-expected inflation report for July might have given investors too much optimism — sending markets soaring from their June bottoms.

Investors hoped the Fed would change course on its path of aggressive interest rate hikes — but Powell put markets in their place — remaining hyper-focused on bringing down inflation, having mentioned “inflation” 46 times in 10 minutes.

• The takeaway: The Fed will continue aggressively fighting inflation with higher interest rates.
• His warning: The Fed is willing to sacrifice short-term economic growth to bring down inflation. Households and businesses are in for more pain.

It’s going to be a challenging period for both investors and businesses (Bloomberg):

• Investors: Morgan Stanley strategists see declining earnings being the largest risk to stock prices — projecting a sharp earnings drop in the coming months.
• Businesses: Challenges in the market creates an “increasingly difficult operating environment” for businesses — impacting their profitability, per Principal Global Investors’ Chief Global Strategist.

As a result of earnings, Mizuho Securities USA’s Chief Economist Steven Ricchiuto expects markets to trade sideways for some time (WSJ).

Looking ahead: September 13 is an important date for investors. Inflation data will be released, which answers an important question: Will the Fed raise interest rates by 0.50% or 0.75% on September 21?

So far, markets peg the odds of a 0.75% raise over 70%, but any positive surprises in the inflation report would be welcomed.