Friday's Market Minute: The Fed Minutes Support the Case for Ongoing Rate Increases

Equity markets staged a mid-day rally yesterday to close in the green after Wednesday’s Fed minutes supported the case for ongoing rate increases. Since early February around the last Fed meeting, rates have trended higher and equities have softened on rising fears that the Fed is going to send this economy into recession.

The meeting took place before the most recent jobs, inflation, and retail sales data for January, all of which were very strong. Resilient economic data such as strong retail sales, and tight labor market conditions are not a bad problem to have. However, it simply means inflation is going to be stickier for longer than perhaps the market thought in late 2022 and early 2023. We cannot expect inflation to move significantly lower because consumers are obviously spending as jobs remain plentiful.

Given that inflation remains stubbornly high, equities will eventually need a fresh catalyst to shake off the recent multi-weekly decline. The current earnings season has been heavier on caution rather than encouraging optimism, and a Fed pause that will inspire a final cyclical rally doesn’t appear likely any time soon.

Based on Fed commentary, the deeply inverted yield curve, and the higher trend in two-year Treasury rates, it appears the Fed has a plan to remain hawkish. They will keep financial conditions tight until a successful battle against inflation is won, or an economic recession manifests due to weak corporate earnings and higher unemployment is all but assured.

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