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A look at how inflation may be starting to ease

JUANA SUMMERS, HOST:

Looking at the headlines, there is a lot of concern about the future of the U.S. economy. But Wall Street just had a banner start to 2023 after a pretty miserable 2022. This has been the best January for the tech-heavy Nasdaq in decades. And NPR's David Gura is here to explain what is going on. Hey there.

DAVID GURA, BYLINE: Hey, Juana.

SUMMERS: So, David, why are markets rallying?

GURA: You know, so much of this has to do with inflation. Stocks struggled last year because of it. And now that there are signs high inflation is easing, there's been this reversal, and stocks are surging. There are economic indicators that are raising concerns, including consumer spending, which is starting to soften. But there are signs the U.S. economy may be more resilient than many economists expected. I mean, just look at the labor market. Now, you may have seen these high-profile layoffs - PayPal, the latest one, announcing today it's cutting 2,000 jobs. But in many sectors, there are still staffing shortages. CVS and Walmart, for instance, announcing pharmacies won't be open as long because there aren't enough pharmacists. So right now, investors are feeling good. They're thinking, hey; maybe the Federal Reserve is going to pull this off. It's going to nail this soft landing. It'll get inflation under control without starting a recession. Or if there is a recession, Juana, that downturn will not be a big one.

SUMMERS: OK. So I've seen the companies are reporting earnings, updating Wall Street on how they did last quarter. Tell us what you're hearing.

GURA: By and large, companies have done better than anticipated. Today, for instance, ExxonMobil said it raked in record profits in 2022. The oil giant made more than $55 billion. And last quarter, General Motors saw its profit surge. The carmaker said it's ironed out some of those supply chain issues that really dogged it for a number of months. But with tech companies, it's a different story. This week, we'll hear from Meta, Facebook's parent company, along with Alphabet and Amazon. And all three of them have announced large job cuts lately. Of course, that's tough for each and every one of those laid off workers. But Wall Street has applauded these companies for scaling back and course correcting. Take Microsoft, for instance. It announced plans to cut 10,000 jobs. And in the weeks since then, its share price has actually gone up by about 4%.

SUMMERS: OK. So what could go wrong here?

GURA: Well, all this optimism could be misplaced. A huge risk is high inflation could be more stubborn than Wall Street expects. And remember; a lot of investors and economists and policymakers did not see inflation surging as much as it did or inflation lasting as long as it has. There's also a risk that if there is a recession, that downturn could be deeper or longer lasting than Wall Street is forecasting. And the Fed is actually getting worried about whether the markets have gotten too optimistic - basically, if they've gone too far. And, Juana, many Fed policymakers have warned inflation could be more persistent than investors expect.

SUMMERS: You mentioned the Fed, so I'd like to ask you about their meeting. It's a two-day meeting that they're now halfway through. What are markets expecting when that meeting wraps up tomorrow?

GURA: Well, almost everyone expects the Fed is going to raise interest rates again. But because of the latest economic data, it'll be a smaller hike of a quarter point. Remember; the Fed's fight against high inflation started with this string of larger hikes of three-quarters a point each. What Wall Street cares about the most is what Fed Chair Jerome Powell says at his news conference after that meeting. As I mentioned, the Fed's gotten worried markets are getting ahead of themselves. And Yung-Yu Ma told me he expects Powell will address that head on. Ma is the chief investment strategist at BMO Wealth Management.

YUNG-YU MA: The Fed wants to signal caution. The Fed really wants to get inflation under control, not just in the short term but really set the stage for inflation to stay under control, really, for an extended period of time and for the medium and long term.

GURA: Wall Street is looking for clues about how the Fed is going to approach interest rate hikes going forward. There is speculation that after another quarter-point increase, the Fed could take a pause, maybe even cut rates this year, given inflation is easing and the economy is slowing down. This press conference tomorrow is an opportunity for the Fed to rein in some of Wall Street's optimism, Juana, and its expectations.

SUMMERS: NPR's David Gura. Thank you.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.