What the Fed isn’t telling you… nothing

Stocks had a mixed close yesterday with pressure coming from a second day of Fed Chair testimony on Capitol Hill. More rate hikes may be in the offing according to the Fed chief.

We now know what we already knew. Go on, read that tagline again… I’ll wait. Got it? The guy in the corner office of the Federal Reserve sat in the hotseat in a Senate chamber yesterday and gave Senators a chance to look good in front of their constituents. Conservatives lambasted him for being too subtle and allowing inflation to soar, while liberals upbraided him for high interest rates and failure to better regulate the banks that failed earlier this year. Sorry Jerome, it’s part of the job. In reality, Jerome, or “Jay” as his friends call him, is quite skillful at testifying in that hostile environment, having done it for several years, successfully, under two opposing administrations, an economic decline, a pandemic, runaway inflation, and a HUGE rate increase. Yep, it’s the job.

But what do we really want to know? Of course, we want to know when the central bank will not only stop raising rates but, even more importantly, when it will start to cut interest rates. Perhaps you were thinking of buying a new home and financing it with a mortgage, and you would like to see those rates fall a bit to make the monthly payments a little more affordable. Perhaps YOU HAVE A FRIEND who has a balance on a credit card who has seen the rate explode. More than likely, you own a stock portfolio which has some really solid stocks, and you suffered some painful losses last year. Your portfolio created great wealth in the years prior to 2022, even weathering a deadly, once in a generation pandemic. You haven’t had such pain since… I don’t know… 2008. Ahh, now you remember the pain, but the memory quickly fades, and you recall the elation you felt AFTER the pain when your portfolio value went higher and higher, but for one or two challenging passages… maybe three.

You have been told that once the Fed decides to cut interest rates, your portfolio will settle back into its former self, returning its respectable average long-term return, so you can go back to reading the funny papers instead of the business section while you eat your morning oats. And yes, maybe plan a trip or buy that home you have been eyeing. You were kind-of hoping that Powell would admit to lawmakers that, indeed, he was prepared to lead his troop of FOMC policymakers to lower interest rates. It is reasonable to hope for that given the potential upside, but alas, Powell did the opposite, almost promising higher rates. BUT WE KNEW THAT! Fed Funds futures have at least 1 more +25 basis-point hike baked in with 100% probability by November, and the Fed’s own Dot Plot shows rates higher by +50 basis points before yearend. It is out there… it has been. Therefore, the market, right here, right now has it factored in.

So, is that it? Are we all good, then? Well, not exactly. As you are probably well aware, things can, and do, change. The Fed has made it clear that future policy moves would be informed by economic data. If the decline in inflation stalls, or it, dare I say, heats up again, it is safe to say that rates will not only go higher, but may even exceed the Fed’s +50 basis-point prediction. You can count on that. What if inflation continues to fall? Well, it is likely that the Fed may only raise rates by +25 basis points by yearend, or perhaps not even at all. The economy, which for the moment, looks surprisingly spry, could trip into a decline. That would be bad, but that would also mean that the Fed would have to stop hiking rates and possibly even lower them. The market, right here, right now, has all that factored in. Why am I saying all this? Because I want to highlight the importance of following the economic numbers in the days, weeks, and even months to come. It is those, not the already expected words of the Fed that will dictate the next policy move. Next week and the week beyond will be chock-full of numbers that the Fed watches closely, the least of which is next week’s PCE Deflator and the week after’s monthly employment report. AND ALL THOSE NUMBERS IN BETWEEN. Get comfortable in your seat, and please pay attention. Don’t worry, you will be able to get back to the funny papers eventually, but the numbers have to warrant it first.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday after Chair Powell did not deliver the soft message traders were hoping for. The S&P500 gained +0.37%, the Dow Jones Industrial Average slipped by -0.01%, the Nasdaq Composite Index rose by +0.95%, and the Russell 2000 Index declined by -0.80%. Bonds fell and 10-year Treasury Note yields gained +7 basis points to 3.79%. Cryptos added +0.49% and Bitcoin advanced by +0.57%. The S&P500 ESG Index rose by +0.55%.

NEXT UP

• S&P Global flash Manufacturing PMI (June) is expected to have inched up slightly to 48.5 from 48.4.
• S&P Global flash Services PMI (June) may have pulled back to 54.0 from 54.9.
• Fed speakers: Mester and Bullard.
• Next week: Durable Goods Orders, more housing data, Consumer Confidence, GDP, Personal Income/Spending, PCE Deflator, and University of Michigan Sentiment. Please check in on Monday to download a weekly calendar of releases.