Fed head Jay Powell announced the FOMC decision today to raise the fed funds rate another quarter point and the market responded almost as if he was talking about a rate cut. What gives? Aren’t rate hikes supposed to be bearish?
Let’s review our market sentiment zoo. Bears are down markets. Bulls are up markets. Doves signal lower rates. Hawks signal higher rates. And higher rates usually make the markets bearish.
So, if the federal reserve chairman announces they are raising rates and expects they will continue to do so, why such a big market rally? One reason could be expectations. Investors constantly check actual economic data as it is released against their expectations, including for earnings, sales, rates, inflation, etc. In this case, perhaps investors were expecting a larger increase of half a percent.
More likely, the reaction was to Powell’s remarks in the press conference following the announcement. I don’t normally listen live to the remarks, but it was a good way to kill time on a long drive. And what I heard was a lot of hope. Although the fight against inflation has not yet shown tons of progress, we are starting to see some signs of slowing inflation, particularly in the goods sectors with things like industrial productions, housing and auto sales coming down significantly.
But Chair Powell emphasized that we have not seen similar decreases in the services sector and that is a larger portion of the economy. Therefore, they expect more rate hikes will be coming. In his words, “we have more work to do.” However, the market doesn’t seem to believe that or doesn’t seem to believe the hikes will amount to much more. The terminal consensus rate is currently around 5%.
As we have said many times, don’t listen to what they say, watch what they do. We certainly are closer to the end of this rate hike cycle than the beginning. And when you hear a dove talking like a hawk, actions speak louder than words.
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