Friday's Market Minute: Powell's Message Fails To Lift Markets

The outlook for interest rate policy has been uncertain since the last FOMC policy meeting in September. The committee has upheld their firm stance on rates and maintains vigilance towards the resurgent risks of inflation. Irrespective of their language, Fed funds futures markets do not currently imply a greater than 50% probability of any additional rate hike for the remainder of this year or next.

 Powell acknowledges that the bond market is helping do their work for them as the sell-off continues driving yields on the 10-year Treasuries closer to the 5% threshold for the first time since 2007. Investors are still reluctant to hold long-term bonds due to duration risks associated with the uncertain outlook with regards to inflation. The sudden rise in long-term borrowing costs obscures the Fed’s assessment of how much higher rates will need to be to tame inflation without risking aggregate economic growth. The economy has been remarkably resilient, but there is certainly an impact on financial assets over time as the cost of capital begins to impede upon returns on investment. The Fed clearly intends to hold interest rates high for an extended period of time as long as economic growth remains sturdy. Recent job growth and retail sales data continues to defy predictions of an economic slowdown, which presents inconsistent signals as to when inflation will return to the Fed's 2% target.

Overall, because of uncertainty surrounding rates, inflation, and recent geopolitical tensions, there is an abundance of reasons to be risk-off. Intraday volatility in both stocks and bonds remains elevated, which suggests high emotional responses from the markets. Despite negative headlines and the possibility of a near-term decline of the S&P 500 towards the 200-day moving average, equity markets are showing a great amount of resilience with the bulk of corporate earnings announcements in the coming weeks.

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