Fed Keeps Hawkish Stance Despite Market Turbulence
Over the last year, the Federal Reserve has increased its benchmark interest rate from near zero to a range of 4.5% to 4.75%, and has signalled plans for even more hikes. Recent economic data showing stubborn inflation and a strong job market has caused market watchers to expect an increasingly hawkish Federal Reserve. As the current inflation rate of 6.4% is the lowest since October 2021, it remains above the Federal Reserve’s target rate of 2%, meaning more rate increases are likely needed to combat inflation.
The stock market has been struggling over the past month, but this shouldn’t be a surprise based on historical patterns. Over the past 25 years, February has been among the worst months for the S&P 500, averaging a loss of 0.4%. Nevertheless, the bull case for stocks is still in place as long as the Fed remains on the path it set last year.
The Fed’s February meeting minutes revealed that members believe “ongoing” interest rate increases are necessary, with a few members pushing for a 50 basis points hike. This has injected dollar bulls with renewed confidence, leaving G10 currencies sore and vulnerable.
It might be more prudent to listen to fresher comments by Fed officials, such as Loretta Mester and James Bullard, who both advocate for a 50-basis points hike. Despite the disruption caused by rising interest rates, Bullard believes that the United States economy can still remain stable. A no-landing scenario appears likely, despite the hawkishness from the Federal Reserve, which should bring solace to investors.
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1. “Why stocks are up despite the risk of tighter monetary policy” TKer by Sam Ro, 17 Feb. 2023, https://www.tker.co/p/stock-market-supported-by-earnings-growth
2. “Economic forecasts are getting revised up, and people aren't thrilled about it” Yahoo News, 19 Feb. 2023, https://news.yahoo.com/economic-forecasts-are-getting-revised-up-and-people-arent-thrilled-about-it-135118589.html
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6. “CNBC Daily Open: Markets Fall as the Fed Shows No Sign of Pausing Interest Rate Hikes” NBC 10 Philadelphia, 23 Feb. 2023, https://www.nbcphiladelphia.com/news/local/cnbc-daily-open-markets-fall-as-the-fed-shows-no-sign-of-pausing-interest-rate-hikes/3506936/
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