Hopeful Signs of Moderating Inflation Despite Fed’s Interest Rate Hikes
By Investors are becoming increasingly hopeful that moderating inflation could signal an end to the Federal Reserve's rate hikes. The central bank has been raising interest rates since the start of 2022 in an effort to combat spiraling consumer prices.[0] This has weighed heavily on the stock market, bond market, and cryptocurrency market.
Optimists even believe that the US could avoid a recession despite the concerns that have been looming over investors for months.[0] This is largely due to the Fed's aggressive interest-rate campaign over the past year, which has spurred some optimism that they may soon stop raising rates or possibly even start cutting them.
Lower interest rates generally stimulate investors to take more risks and invest in high-risk assets such as growth stocks, due to the decreased cost of borrowing.[1] Since the start of 2022, the Federal Reserve has raised the federal-funds rate from zero to its current target of 4.5%-4.75%.[2] The futures markets in bond trading indicate that the Federal Reserve is anticipated to increase interest rates by an additional 0.5% by May.[3]
The US stock market has gotten off to a strong start in 2023 following a dreary bear market last year.[4] Since the start of 2021, the S&P 500 has jumped more than 7%, and investors are hoping that the worst of the bear market is over.[5]
The market had expected that the Federal Reserve would raise the fed funds rate to 5.0%, their current target, at a pace of 25 basis points at a time.[6] A 50 basis point hike would not only double the Fed's anticipated rate of rises, but also give access to a higher terminal rate.[6] As per the most recent nonfarm payroll report, the US added 517,000 new jobs in January 2023, and the wage growth data was in line with expectations.[7]
However, the stock market is seeing an increase in volatility as investors get ready for Tuesday's inflation print, where some economists expect a 0.5% month-on-month rise for the first time in three months.[1] Last week, a strong January jobs report and statements made by Federal Reserve Chair Jerome Powell indicating the Fed would not be loosening its tight monetary policy have likely been a factor in the decline of stocks.[1]
Many market observers have been taken aback by the impressive surge of the main indices this year, especially considering the Federal Reserve just raised interest rates again as it endeavors to battle persistent inflation.[8]
0. “The Stock Market Is Rallying. Will It Last?” msnNOW, 8 Feb. 2023, https://www.msn.com/en-us/money/markets/the-stock-market-is-rallying-will-it-last/ar-AA17fyqW
1. “The stock market rally of 2023 is losing steam – the Nasdaq and S&P 500 just notched their worst weekly runs in nearly …” msnNOW, 13 Feb. 2023, https://www.msn.com/en-us/money/markets/the-stock-market-rally-of-2023-is-losing-steam-the-nasdaq-and-sandp-500-just-notched-their-worst-weekly-runs-in-nearly-2-months/ar-AA17qSbS
2. “5 Blue-Chip Stocks to Buy Despite Dow's Sluggish Start in 2023” Yahoo Life, 14 Feb. 2023, https://www.yahoo.com/lifestyle/5-blue-chip-stocks-buy-131001450.html
3. “3 Stock Strategists and 3 Scenarios for the Stock Market in 2023” Morningstar, 9 Feb. 2023, https://www.morningstar.com/articles/1136581/3-stock-strategists-and-3-scenarios-for-the-stock-market-in-2023
4. “Why 2023 Will Be the Year of the Stock Picker” Zacks Investment Research, 13 Feb. 2023, https://www.zacks.com/commentary/2053502/why-2023-will-be-the-year-of-the-stock-picker
5. “The S&P 500 Is Rebounding. Is It Safe to Buy Now?” The Motley Fool, 8 Feb. 2023, https://www.fool.com/investing/2023/02/08/the-sp-500-is-rebounding-is-it-safe-to-buy-now/
6. “Will Zero Days to Expiration (0DTE) Options Crash Stocks?” Unseen Opportunity, 16 Feb. 2023, https://www.unseenopp.com/will-zero-day-to-expiration-0dte-options-crash-stocks/
7. “Fearing to miss the rally, investors are pushing stock markets up” Business Review, 6 Feb. 2023, https://business-review.eu/investments/fearing-to-miss-the-rally-investors-are-pushing-stock-markets-up-241238
8. “Current stock market rally ‘likely to mark the high point' for 2023: JPMorgan” msnNOW, 13 Feb. 2023, https://www.msn.com/en-us/money/markets/current-stock-market-rally-likely-to-mark-the-high-point-for-2023-jpmorgan/ar-AA17q9lu
