The FOMC Message is Still Loud and Clear

While the FOMC statement was dovish, Jay Powell remained hawkish in the post-announcement press conference. Maintaining a firm lid on inflation is still the top priority of the Fed. Altogether, the Fed acknowledged that the pace and magnitude of rate hikes this year has been strong medicine for the treatment of inflation, implying that future doses might not need to be as large. Powell did give the market what it has hoped for and speculated about for weeks, a signal that the pace of rate increases would soon slow.

The narrative around a policy pivot is a hopeful illusion that will not become reality until there are clear signs of a meaningful contraction in labor market along with lower-than-expected inflation prints. If the labor market quickly cools, the Fed might be done tightening in early to mid-2023, which means the terminal cycle rate might ultimately stop at 5%. To that extent, the post-Fed hangover continues to keep pressure on bonds and equities as the impact from the first round of aggressive hikes appears to be clearly felt.

Weak housing data, headline layoff announcements, and corporate earnings announcements are littered with phrases blaming macroeconomic headwinds for lower forward revenue and earnings guidance. Leading indicators continue to deteriorate, and the strong dollar contributes to weaker earnings per share. While there may be plenty of opportunities in the market as some great companies are starting to be really undervalued with a great growth track record, this may still not be the right time to be overtly bullish.

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