Stock Market Rally Continues Despite Repeated Fed Rate Hike Warnings

The SPDR S&P 500 ETF Trust SPY has rallied 3.2% in the past five days as investors seem to be taking an increasingly bullish tone toward the health of the U.S. economy, particularly on the inflation front. However, hawkish remarks from Federal Reserve officials this week suggest investors may be premature in assuming the Fed will be shifting its monetary policy approach anytime soon.

The Federal Reserve raised its target fed funds rate by 0.75% last week to a new range of between 2.25% and 2.5%, its second 0.75% rate hike in two months. The market has reacted strongly to commentary by Fed Chair Jerome Powell that he does not believe the U.S. economy is in a recession because of the resiliency of the labor market. However, several Fed officials have come out this week to emphasize that inflation, not the jobs market, is the Fed's top priority.

Related Link: Experts React To 0.75% Fed Rate Hike: 'Don't Think They Will Pause'

More Rate Hikes Coming: On Tuesday, San Francisco Fed President Mary Daly said the Fed is "nowhere near almost done" in its battle against inflation and investors are wrong to assume the Fed's recent large rate hikes mean it won't continue to raise rates at future meetings.

Meanwhile, Cleveland Fed President Loretta Mester said “we haven’t seen inflation cool at all” and the Fed is still looking for evidence that its recent rate hikes have resulted in peak inflation.

Related Link: S&P 500 Completes Best Month Since 2020, Shrugging Off Fed Rate Hike

Inflation Is All That Matters: Looking ahead to the Federal Open Market Committee's next meeting in September, Chicago Fed President Charles Evans said another large interest rate hike is certainly on the table at this point.

"I think that there’s enough time to play out that 50 is a reasonable assessment, but 75 could also be OK," Evans said Tuesday.

On Sunday, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said the Fed is prioritizing inflation, even if its policies trigger a U.S. recession.

"We are committed to bringing inflation down, and we're going to do what we need to do," Kashari said.

The bond market is currently pricing in a 56.5% chance of a 0.5% rate hike in September and a 43.5% chance of a third 0.75% hike, according to CME Group.

Benzinga's Take: The recent rally in stocks may be in response to the fact that second-quarter earnings season and third-quarter guidance hasn't been as bad as feared given rising interest rates. The FOMC will continue to monitor economic data between now and its next scheduled meeting in September and communicate as clearly as possible in advance what investors should expect.

Photo: Courtesy of Rafael Saldaña on flickr