FOMC Gives Investors a Reality Check

Two months of better-than-expected inflation data were enough to convince the Fed to ease off the hawkish rhetoric. It appears the Fed has not yet welcomed the disinflationary trends that have started to emerge. They remain laser-focused on the robust labor market as a risk to sustained elevated inflation and telegraphed a commitment to taking rates much higher.

The Fed’s statement and projections for the Federal funds rate reaching 5.1% is 50 basis points higher than the forecast as recent as September. From a stock market standpoint, price action Wednesday and yesterday’s follow through decline suggests market read the Fed completely wrong in thinking that slower rate hikes meant the Fed was close to reaching the terminal cycle effective policy rate. The Fed came out pushing hard, saying not only would they raise rates, but they would raise them above current market pricing.

Perhaps a bit of complacency or desperation to see value in equity markets since the October lows caused investors to overlook the concerns that have plagued the FOMC for nearly a year. The fear of entrenched inflation is still a much greater concern due to strong labor and wage figures. Based on the current level of prices and employment compared to the effective Federal funds rate, one could make the case that real interest rates remain accommodative despite monumental increases this year.

Therefore, it should be no surprise that Powell continues to press the notion that is there is still much work to be done. The decelerating headline inflation numbers that recently spurred excitement for bullish investors was trounced by a Fed that is adamant to further tighten financial conditions until aggregate demand pulls back far enough to noticeably dent the labor market and economy. 

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