Friday's Market Minute: FOMC Minutes Put a Slight Damper on Equities

The stock market has seen volatility so far in early 2023 as investors eagerly await the outcome of the jobs report today and December’s CPI report next week. Despite the 2022 correction and much more reasonable valuations, the market may still have more downside risk as corporations update 2023 earnings guidance that could lead to further downgrades and selling pressure. Some investors are increasingly coming around to the idea that the Fed will be forced into cutting rates earlier than previously anticipated to support the economy.

However, it is unlikely the Fed begins to cut rates in 2023 if PCE inflation is above 2% and unemployment is below 4%. December’s FOMC minutes revealed that none of the Fed officials anticipate cutting interest rates this year, which continues to dampen any short-lived daily rallies. The minutes also indicated that inflation remains the chief concern and doing too little in terms of tightening may fail to bring inflation back to the Fed’s long term trend target of 2%. Given the erratic nature of post-pandemic economic data, the FOMC remains understandably cautious on pausing the current rate hike cycle prematurely. 

There are also fears that the Fed will have raised rates excessively, leading to an unnecessary reduction in economic activity. One ominous sign of constrained economic activity is the deeply inverted yield curve, where rates on short-term bonds are higher than on longer maturities. While this has historically been a reliable predictor of an impending recession, an inverted yield curve is also a reflection of the expectation by market participants that inflation rates are likely to fall and that the central bank will cut interest rates to support growth again, which also will calm a fragile stock market.

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