Friday's Market Minute: Expect The Fed To Remain Aggressive on Inflation

Equities traded higher yesterday ahead of Federal Reserve Chair Powell’s Jackson Hole speech today. Investors have been at ease since the June lows after worries about the Fed’s response to unanticipated inflation triggered the 2022 cyclical bear market. Based on the slightly higher second revision to 2Q GDP and with core PCE steady at 4.4%, investors should expect the Fed to remain aggressive with tightening going forward. Two-year yields continue to trend higher, marking the path the Fed is embarking on to increase the cost of credit.

As long as the labor market remains strong, the FOMC has no reason to pivot backwards on rates. The Fed can calmly focus on taming inflation in sacrifice of economic growth. The inflation fight is still not over, yet the market since mid-summer seems to believe the narrative of a "soft-landing" is more probable. Based on two-year Treasury yields, it appears the market expects rates to rise by at least another percentage point by the end of the year, with a third consecutive 75-basis-point increase under consideration for the September meeting.

It’s too soon to tell if the market has simply undergone a short-covering counter trend bear market rally considering the lagging impact of tighter monetary policy. Bulls seem eager to buy the recent pullback, yet as long as the major indices remain below their respective 200-day moving averages, bears are still in control. 

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