Friday's Market Minute: The Fed's Hawkish Rate Hike Remains the Dominant Market Driver

The stock market continues to struggle with a Federal Reserve willing to risk a prolonged recession to combat inflation. The Fed’s summary of economic projections from the most recent FOMC meeting describes an economic outlook very different from the report released three months ago. In a nutshell, 2022 GDP growth was downgraded from 1.7% to 0.2%, and the full year forecast for 2023 was cut to 1.2% from 1.7%. The projected policy interest rate for year-end 2023 was upgraded from 3.8% to 4.6%, which is more in line with the peak policy rate the futures market anticipates mid-year. Lastly, the 2023 unemployment projection went from 3.9% to 4.4%.

The optimistic summary suggests the possibility of a near-full employment economy, higher rates, and below-trend GDP growth. In other words, the Fed anticipates a soft landing, while the equity markets remain unconvinced. The notion of a central bank that can cool the economy without excessive job losses is unrealistic. Restrictive monetary policy will eventually root out inflation, but the cost to employment, corporate earnings, and equity valuations appears to have not yet been fully borne.

While the Fed’s hawkish rate hike is the dominant driver in the broader markets, it is becoming clearer that bad news is coming on the economy and earnings. The bear market is anticipating this news. When the bad news is behind us, and the market sees optimism in the future, it will start the next bull market. Meanwhile traders will continue to look for bounces in the bear market.

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