Wall Street doesn’t want the Fed to chill out

By Julia Horowitz, CNN Business

Investors are uneasy as the Federal Reserve gears up for its latest policy announcement on Wednesday. But their hope is that the central bank and Chair Jerome Powell will keep talking tough, steering the path forward at an uncertain moment.

What’s happening: The Fed is expected to hike interest rates by three-quarters of a percentage point as it continues with its ambitious campaign to bring down inflation, which hit a 40-year high in June. There had been some speculation that the Fed could raise rates by a full percentage point for the first time in its modern history, but that now looks less likely.

Even the more conservative option would have major ripple effects.

“That would be unprecedented that we’ve gone with that large a move in two consecutive meetings,” St. Louis Federal Reserve President Jim Bullard said in an interview earlier this month.

And to Wall Street, that’s a good thing. Investors concede that the Fed has a difficult task at hand as it tries to control inflation without raising borrowing costs so aggressively that it tips the US economy into a recession.

But for now, they’d rather the Fed indicate that it plans to keep its resolve rather than adopt a more accommodating stance. In unstable times, the argument goes, consistency is key.

“The last thing the Fed wants to do now is to allow the market to think it’s about to embark on a dovish pivot, despite increasing evidence that the economy is slowing,” Michael Hewson, chief market analyst at CMC Markets, told clients on Wednesday.

That’s because the Fed has worked hard to bolster its inflation-fighting credentials after they were called into question earlier this year. By the time the central bank started raising interest rates in March, core inflation — as tracked by the Personal Consumption Expenditures Price Index — was already at 5.2%, well above its target of near 2%.

“The Fed is obliged to really tighten because according to many observers, they started this cycle too late,” Marco Pirondini, head of US equities at Amundi Asset Management, told me.

What does that mean in practice? Investors will be looking for Powell to repeat a line that’s become his maxim: Targeting inflation is the Fed’s top priority, even if it means unemployment, which is near historic lows, could start to tick up.

They’ll also be on alert for guidance about what the Fed will do at its next meeting in September. Right now, there’s little market consensus.

Powell has previously said the central bank will stay “data dependent,” so he’s unlikely to commit to a specific course. Between now and September’s gathering, the Fed will get two jobs reports and another raft of inflation intel.

The advertising slowdown is hitting the biggest players

Even Microsoft and Google’s Alphabet aren’t insulated from the pullback in advertising spending as companies buckle down for a possible recession.

The latest: Sales from Google’s core advertising business hit $56 billion between April and June, the company announced after markets closed on Tuesday.

That’s a nearly 12% increase year-over-year, but represents a significant slowdown compared to last year. In the same quarter of 2021, Google’s ad revenue jumped by almost 69%.

Microsoft also reported on Tuesday that a reduction in advertising spend last quarter cost it $100 million in revenue.

Remember: Investors panicked last week when Snap posted a brutal loss as advertisers pressed pause. But Wall Street isn’t giving Alphabet and Microsoft the same treatment. Alphabet’s shares are up 3.6% in premarket trading on Wednesday, while Microsoft’s stock is 3.8% higher.

That’s because there were other bright spots — namely the cloud.

Microsoft’s cloud business brought in $25 billion in revenue last quarter, a 28% increase, while Google reported a nearly 36% year-over-year revenue gain from its cloud computing segment.

“Whilst advertising spends will go up and down on economic cycles, the overall shift to Cloud computing as the backbone for all digital business — advertising, marketing and sales — is long term,” said Tom Johnson, global chief digital officer at media agency Mindshare Worldwide.

Instagram is dealing with a Kardashian problem

To beat back the threat of TikTok, Instagram has unveiled a suite of updates to its platform. But the social media app isn’t getting positive feedback.

Posts calling on the company to “Make Instagram Instagram again” have gone viral after it started prioritizing algorithmically-recommended posts and videos from its Reels product over photos from friends.

Even Kim Kardashian and Kylie Jenner have joined the chorus of dissenters. The famous half-sisters are among Instagram’s most-followed accounts, with 326 million and 360 million followers, respectively, my CNN Business colleagues Clare Duffy and Jennifer Korn note.

Instagram chief Adam Mosseri addressed the criticism in a video post on the platform Tuesday. He acknowledged that Instagram is “experimenting with a number of different changes to the app,” but emphasized that those decisions are based on what the company is seeing in its data.

“We’re going to continue to support photos. They’re part of our heritage,” he said. “That said, I need to be honest: I do believe that more and more of Instagram is going to become video over time.”

Investor insight: Instagram parent Meta Platforms reports results after US markets close on Wednesday. Its shares are down 48% year-to-date.

Last quarter, Meta said investments in content recommended by algorithms were essential for it to stay competitive, and that Reels already made up more than 20% of the time people spend on Instagram. What’s the latest? And will CEO Mark Zuckerberg weigh in?

Up next

Boeing, Hilton, Kraft Heinz and Spotify report results before US markets open. Etsy, Ford, Meta and Qualcomm follow after the close.

Also today: The Federal Reserve’s latest interest rate decision goes live at 2 p.m. ET, followed by a press conference with Chair Jerome Powell.

Coming tomorrow: Did America’s GDP contract for two consecutive quarters? Economists polled by Reuters expect 0.5% growth between April and June, but the risks of a surprise are high.

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