The Fed rate was raised by 75 bp yesterday. up to 3–3.25%. Most – from analysts to derivatives market participants – were waiting for just such a step. All day until the announcement of the decision of the FOMC (Federal Open Market Committee, the Federal Committee on Operations on the Open Market), the S & P 500 index was in the “green zone”. It might seem that everything is already in the price. But no.
Two hours before the end of trading (just before the release of the Fed announcement), the broad market index peacefully added 0.8%, and within seconds, stocks were flying up and down like a rollercoaster. The S&P 500 has been both above 3900 and below 3800. In 4 minutes, it lost 1.5%, then rebounded, fell again, rose again, fell again, and suddenly went up powerfully. 45 minutes after the rate hike, it was 1.33% higher than Tuesday’s close, but then a no less confident fall began.
The S&P 500 ended the day down 1.71%. The Nasdaq Composite shed 1.79% and the Dow Jones Industrial Average shed 1.7%. The yield on two-year treasury bonds exceeded 4% for the first time since 2007. The dollar soared, and the euro fell to a minimum since October 2002 – $ 0.9805.
The main conclusion that the markets made from the actions and statements of the Fed was that the rate hike will go faster, end higher, and stay at a high level longer than expected. The rate is already at the highest level since January 2008, but new forecasts from Fed officials show that it will rise to a range of 4.25-4.50% by the end of the year, and to 4.50-4.75% in 2023.
In order to increase the rate by 125 bp at the two remaining meetings this year. you need to raise it by 50 bp on one, and by 75 bp on the other. And the last, the market reasoned, is likely to happen at the next meeting.
And Fed Chairman Jerome Powell’s press conference was no less hawkish than his speech at Jackson Hole that killed the bear rally in August. “We have to leave inflation behind,” he said yesterday. I wish there was a painless way to do this. He doesn’t exist.”
He spoke directly about the coming pain. Inflation hasn’t come down as much as the Fed expected, and Jerome Powell now agrees that a soft landing won’t be easy. “No one knows whether this process will lead to a recession, and if so, how significant this recession will be,” he said.
Powell clearly wanted to be compared to the legendary Fed Chairman Paul Volcker, who beat US stagflation at the cost of two recessions. Yesterday he said that, together with his colleagues, he would continue in the same spirit as now, until the work to return inflation to 2% is completed. And according to Bloomberg, the “will keep at it” used here directly refers to the title of Walker’s memoirs “Keeping at It”.
“The Fed has reset expectations to eliminate market participants’ counterproductive reversal speculation for now,” Johan Grahn, chief ETF strategist at Allianz Investment Management, told Reuters yesterday. “It makes sense for a ‘bold as Volker’ Fed and can always opt out of it later if need be.”
But there are also opinions that a quick rate hike is serious and for a long time, and, perhaps, in the end it will turn out to be noticeably higher than the current Fed forecast. The lifting step itself, applied already at the third meeting in a row and expected at the next one, becomes the base one.
“I think that 75 b.p. is a new 25 bp. until something breaks—and so far, nothing has broken,” Brandywine Global portfolio manager Bill Zox told CNBC yesterday. – The Fed has not come close to a pause or a reversal. They are focused like a laser on breaking inflation. The key question is what else they can break.”
While the Fed is tightening monetary policy and market participants are trying to assess where exactly the US economy is so thin that it will begin to tear, stocks have few options. “Markets are dancing to the federal funds waltz, with the bond market outperforming the stock market. After the FOMC signaled a ‘higher and longer’ interest rate policy, the pace of the dance has quickened, increasing the risk that both could spiral out of control, CFRA chief strategist Sam Stovall wrote to clients yesterday. “Since the 3800 S&P 500 level has been breached, we now look forward to retesting the June 16 close low at 3666.77.”