How the Fed stopped the 'doom loop' and why it could return

New York(CNN Business) 1. Vicious circle: Federal Reserve officials had a serious problem late last year. Fears on Wall Street about an imminent recession threatened to become a self-fulfilling prophecy.

Plunging stock prices -- the S&P 500 suffered its worst December since the Great Depression -- dealt a serious blow to confidence among consumers and CEOs alike. And waning confidence threatened to cause households and businesses to delay spending -- a major challenge for the economy. It was a vicious circle.

"They had to stop this doom loop," said Seema Shah, global investment strategist at Principal Global Investors, which manages more than $600 billion in assets.

The Fed's sharp pivot, from very hawkish to very dovish, successfully broke the cycle. Fed chief Jerome Powell promised to be extremely "patient" with raising interest rates. The Fed even said it could soon stop shrinking its balance sheet -- granting Wall Street one of its biggest wishes.

Inspired by the Fed's reversal, US stock prices skyrocketed to start 2019. That in turn boosted sentiment among American shoppers and business decisionmakers.

"The Fed did the right thing," said Shah.

Powell could provide new insights into the Fed's rapid reversal on "60 Minutes" Sunday evening. The CBS (CBS) program is scheduled to air a rare interview of Powell, along with his predecessors Janet Yellen and Ben Bernanke.

After a "series of policy blunders," the Fed has successfully "calmed markets for now," according to Scott Minerd, global chief investment officer at Guggenheim Partners.

But Minerd's firm warned in a recent report that its recession forecasting tools continue to point to a downturn starting by mid-2020.

'Held hostage'

One potential problem facing the suddenly-dovish Fed is how it would respond to an outbreak of inflation.

Although inflation has long been in check, some wonder how long that will last. With the labor market at or near full capacity, wages are finally heating up.

Last week's jobs report showed that the United States added just 20,000 jobs in February, greatly missing expectations. Yet wages jumped by 3.4% -- the fastest pace in more than a decade.

"We see further wage gains ahead," Guggenheim wrote in the report. The firm said that "further rate hikes may be required" in 2020 if inflation expectations begin to rise.

Others believe inflation will remain in check, despite historically low unemployment.

"I don't think inflation will get out of hand," said Gus Faucher, chief economist at PNC.

But if long-dormant inflation finally awakens, the Fed could be forced to resume its interest rate hiking cycle -- posing a potential problem for the market and credit-sensitive businesses.

"There is a real fear that once inflation comes, the Fed is going to be caught on their back foot. Will they have to slam on the brakes?" said Principal's Shah.

That could cause the "doom loop" between financial markets and confidence to start all over again.

"It feels like they are being held hostage by the market," said Shah.

2. Big week for Tesla: The electric car company said it would unveil its mass-market Model Y crossover SUV at an event on March 14. As consumer enthusiasm for sedans fades in favor of hatchbacks, crossovers and SUVs, the Model Y could become Tesla's (TSLA) most important car.

On Monday, Tesla must respond to the SEC's request to hold Elon Musk in contempt of a settlement agreement. The SEC said Musk violated a settlement last month when he incorrectly tweeted the number of cars Tesla expected to produce in 2019.

3. T-Mobile and Sprint: T-Mobile (TMUS) CEO John Legere and Sprint (S) CEO Michel Combes will testify before the House Judiciary subcommittee on Wednesday. They'll answer questions about their companies' planned merger.

The companies have claimed that they need to merge to remain competitive with larger rivals Verizon (VZ) and AT&T as the wireless market shifts to 5G. AT&T (T) owns CNN's parent company, Warner Media.

4. Wells Fargo: Wells Fargo (WFC) CEO Tim Sloan will testify before the House Financial Services committee Wednesday in a hearing titled, "Holding megabanks accountable: An examination of Wells Fargo's pattern of consumer abuses."

Wells Fargo continues to rebound from its several scandals over the past few years. It remains under close scrutiny from government regulators, including the Federal Reserve.

5. It's the (American) economy, stupid: Investors looking for more signs of direction for the US economy will have plenty of reports to examine this week.

Retail sales, durable goods, new home sales, industrial production and consumer confidence highlight a long list of economic reports coming in the next five days.

6. Coming this week:

Monday — US retail sales report for January. Tesla's deadline to respond to the SEC; Stitch Fix (SFIX) earnings

Tuesday — Dick's Sporting Goods (DKS) earnings; Wells Fargo CEO testifies before House Financial Services committee; T-Mobile and Sprint CEOs testify before the House Judiciary subcommittee

Wednesday — US durable goods report

Thursday — Dollar General (DG) earnings; New US home sales report; Tesla holds Model Y event

Friday — US industrial production and US consumer confidence report