Fed Rate Hikes vs. Wall Street: Face-Off Looms as Inflation Rises
By This week, investors are bracing for a face-off between Jerome Powell and Wall Street. The Federal Reserve is expected to reduce the pace at which it is hiking interest rates to a quarter of a percentage point in the upcoming February meeting, following a similar deceleration in December.[0] Despite the slew of interest-rate hikes in 2022, financial conditions are the loosest since last February as investors bet fading inflation will allow the central bank to soon cease raising borrowing costs and then cut them later this year.[1]
The current effective Federal Funds rate is 4.33%, which implies that, based on the Fed's guidance, the Fed has another 75bpt to go before the pause.[2] It is expected that the Federal Reserve will increase the rate by 25 basis points (bpt) on February 1st, 25bpt on March 22nd, and 25bpt on May 3rd, and keep the rate at 5.1% for the remainder of 2023.[3] This week's Fed meeting will be closely watched to see if investors are right to believe that inflation has indeed peaked and prospective rate hikes should slow.[4]
The Federal Reserve is faced with an issue they have not encountered since the 1980s: inflation.[5] Inflation has decreased somewhat, however it is still around 3 times what the Federal Reserve is aiming for.[5] The Federal Reserve is desperate to avoid repeating the same blunder as in the 1970s, which was to loosen monetary policy and cause inflation to resurge.[5] To prevent inflation from returning, we must take decisive action to reduce demand in a variety of ways, as we have done previously.[5] The clearest strategy is to maintain a highly restrictive monetary policy.[5]
According to the Fed's dot plot forecast, policy makers anticipate the fed-funds rate to reach a high above 5% and remain there, which is contrary to what fed-funds futures suggest, that cuts could be made by the end of the year. The current fed-funds rate is 4.25% to 4.5%.[6] The Fed has a clear incentive to push back against the trade given rising stocks and bonds could fan the very inflation they are trying to manage.
This week also brings a host of earnings reports from Amazon (AMZN) , Apple (AAPL) , AMD (AMD) , Meta Platforms (META) , Caterpillar (CAT) , and dozens of other key names.[7]
0. “S&P 500 Forecast: Continues To Attempt A Move To The Upside” MENAFN.COM, 27 Jan. 2023, https://menafn.com/1105486822/SP-500-Forecast-Continues-To-Attempt-A-Move-To-The-Upside
1. “Fed’s Wall Street Clash Sets Stage for Powell’s Hawkish Message” Forex Factory, 30 Jan. 2023, https://www.forexfactory.com/news/1202914-feds-wall-street-clash-sets-stage-for-powells
2. “Fed To Signal Hawkish Pause – Stock Market Implications” Seeking Alpha, 30 Jan. 2023, https://seekingalpha.com/article/4573509-fed-signal-hawkish-pause-implications-stock-market
3. “Fed Meeting Preview: The Magic Show of Interest Rates, Inflation, and Growth” Action Forex, 30 Jan. 2023, https://www.actionforex.com/contributors/fundamental-analysis/483919-fed-meeting-preview-the-magic-show-of-interest-rates-inflation-and-growth/
4. “Market vs Fed” Philstar.com, 29 Jan. 2023, https://www.philstar.com/business/2023/01/30/2241107/market-vs-fed
5. “S&P 500 Forecast: Playing Chicken with the Federal Reserve” DailyForex.com, 30 Jan. 2023, https://www.dailyforex.com/forex-technical-analysis/2023/01/sp-500-forecast-30-january-2023/190668
6. “Tech rally is ‘biggest game of chicken between the Fed and the market I've ever seen,' says analyst” Morningstar, 24 Jan. 2023, https://www.morningstar.com/news/marketwatch/20230124464/tech-rally-is-biggest-game-of-chicken-between-the-fed-and-the-market-ive-ever-seen-says-analyst
7. “Fed Funds Forecasts- Mind The Gap – RIA” Real Investment Advice, 30 Jan. 2023, https://realinvestmentadvice.com/fed-funds-forecasts-mind-the-gap/
