Inflation is coming down, but it’s still above the Federal Reserve’s target of 2%, which means the Fed won’t quit hiking rates as soon as Wall Street would like. The consensus is that we’ll see one more quarter-point rate hike from the Fed in May, before the central bank pauses.

Problem is, the economy already is slowing down and the banking crisis continues to cause jitters among businesses and consumers.

Another rate hike could wreak gratuitous damage to the economy, but Fed Chair Jerome Powell and his cohorts are eager to show “street cred” when it comes to fighting inflation.

Many analysts, as well as lawmakers on Capitol Hill, question the wisdom of another rate hike, in the context of inflation reports that show substantial declines in prices. But until the Fed stops raising interest rates, investors will be forced to navigate treacherous waters.

Economic crosscurrents…

With the March consumer price index (CPI) now a matter of record, Wall Street’s attention is turning to the Fed’s next interest rates announcement in May.

The March CPI rose 5% in the year through March, down from 6% in February and representing a two-year low. The CPI data showed deflationary trends among key components, notably housing and services.

Another factor that should cool inflation is the lingering economic harm from banking sector turmoil. The shock waves continue to be felt, in the U.S. and overseas. UBS’ (NYSE: UBS) planned bailout of Credit Suisse (NYSE: CS) is dampening global sentiment as well.

The recent bankruptcies of a handful of U.S. regional banks haven’t triggered another 2008 debacle, but the financial uncertainty is a headwind for the economy. Even healthy banks are getting more cautious about lending.

These crosscurrents are confusing investors and generating volatility in trading. On Wednesday, in the immediate wake of the positive March CPI report, U.S. stocks surged. But as the trading day wore on, investors started to fret about an impending recession and the indices ended in the red, after choppy trading. Bearish statements from Fed officials about the economy didn’t help.

However, the main U.S. stock market indices closed sharply higher on Thursday, as follows:

• DJIA: +1.14%
• S&P 500: +1.33%
• NASDAQ: +1.99%
• Russell 2000: +1.30%

Fed funds futures traders are currently pricing in a 70% probability that the central bank will boost rates by an additional 25 basis points at its May 2-3 meeting. The fed funds rate target currently hovers in the 4.75%-5.00% range (see chart).

The good news is that the S&P 500 still sits above its 200-day moving average. The 200-day moving average represents the average closing price over the past 200 days. The moving average gives us a clue as to whether the trend is up or down; it also identifies potential support or resistance areas.

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The big test will come with first-quarter 2023 earnings results, beginning with report cards from the major U.S.-based banks on Friday.

If the banking sector’s earnings results come in weaker than expected, investor moods could further sour, sending the broader market downward. Given liquidity concerns in the financial sector, we could witness disappointing guidance from money center banks for the rest of 2023.

To be sure, higher interest rates are generating greater interest income for banks, but much of that gain has been offset by bigger provisions for expected loan losses as the economy sputters and inflation-wary consumers cut back on borrowing and spending.

But there’s money to be made in the mayhem that creates stock market uncertainty. That’s why we launched the Mayhem Trader investment service two years ago.

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John Persinos is the editorial director of Investing Daily.

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