Fed Keeps Hawkish Stance Despite Market Turbulence
By 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.[0] Recent economic data showing stubborn inflation and a strong job market has caused market watchers to expect an increasingly hawkish Federal Reserve.[1] 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.[2]
The stock market has been struggling over the past month, but this shouldn’t be a surprise based on historical patterns.[3] Over the past 25 years, February has been among the worst months for the S&P 500, averaging a loss of 0.4%.[3] Nevertheless, the bull case for stocks is still in place as long as the Fed remains on the path it set last year.[3]
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.[4] This has injected dollar bulls with renewed confidence, leaving G10 currencies sore and vulnerable.[5]
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.[6] Despite the disruption caused by rising interest rates, Bullard believes that the United States economy can still remain stable.[7] A no-landing scenario appears likely, despite the hawkishness from the Federal Reserve, which should bring solace to investors.[7]
0. “Retail Investors Are Shrugging Off The Fed's Rate Hikes” Investopedia, 20 Feb. 2023, https://www.investopedia.com/retail-investors-are-shrugging-off-the-fed-s-rate-hikes-7111439
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
3. “Stock-market believers say ‘stage still set’ for U.S. economy to accelerate in second half of year” Yahoo! Voices, 26 Feb. 2023, https://www.yahoo.com/now/stock-market-believers-stage-still-171457280.html
4. “The stock market is flipped upside down as traders defy Fed, chase risk” Markets Insider, 18 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-trends-flipped-upside-down-investors-defy-fed-2023-2
5. “Sentiment Shaky Ahead of Fed Minutes and “Higher For Longer” Rates” Action Forex, 21 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/487421-sentiment-shaky-ahead-of-fed-minutes-and-higher-for-longer-rates/
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/
7. “CNBC Daily Open: Markets fall as the Fed shows no sign of pivoting away from interest rate hikes” CNBC, 22 Feb. 2023, https://www.cnbc.com/2023/02/23/stock-markets-the-fed-shows-no-sign-of-pivoting-away-from-rate-hikes.html
