Fed’s Hawkishness Persists, But Investors Remain Bullish on Stocks

The Federal Reserve has been steadily increasing its benchmark interest rate for the past year, and has telegraphed plans for additional hikes to come.[0] This week, members of the Fed signaled that more rate increases are needed to combat stubborn inflation, which is still well above the Fed’s target rate of 2%. The Fed is also reducing its balance sheet each month by about $100 billion, essentially sucking liquidity out of markets.[1]

Despite the recent tough times experienced by US stocks, those who have faith in the stock market remain hopeful that the Fed’s halting of rate hikes will result in a rebound in the later part of the year.[2] The S&P 500’s uptrend that started last fall continues even with the index losing 2.6% this month.[2] However, risks to this outlook abound, as a new paper argues that the Fed may need to raise interest rates as high as 6.5%, raising the specter of a so-called hard landing in which the economy falls into a recession.[2]

The Federal Open Market Committee’s meeting minutes from February showed that members thought that “ongoing” interest rate hikes were necessary.[3] Most members of the board approved a 0.25% increase in rates, while a few suggested raising them by 0.50%.[3] U.S. stocks ended Wednesday lower, though the Nasdaq Composite eked out a 0.13% increase, and European markets fell too.[3] Asia-Pacific markets were mixed on Thursday, with South Korea’s Kospi rising 1%.[4]

Furthermore, it is evident that the Federal Reserve is becoming more forceful in its battle against inflation. Krishna Guha, the head of global policy and central bank strategy at Evercore ISI, stated that there was “few”[3] The meeting occurred before the Federal Reserve had knowledge of the impressive labor data from January, along with the higher-than-anticipated consumer price index report and the resurgence of retail sales.[3] Hence, it is wiser to pay attention to more recent remarks from Federal Reserve officials like Loretta Mester and James Bullard, who both suggest raising rates by 0.50%.[4] Investors should take heart in the fact that the Federal Reserve’s hawkishness appears to be leading to a situation where there won’t be a “no effort in the minutes to flag the possibility of stepping back up to a 50bp pace of hikes,” or a slowing down[3]

0. “Retail Investors Are Shrugging Off The Fed’s Rate Hikes” Investopedia, 20 Feb. 2023, https://www.investopedia.com/retail-investors-are-shrugging-off-the-fed-s-rate-hikes-7111439

1. “The stock market is flipped upside down as traders defy Fed, chase risk” Markets Insider, 18 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-trends-flipped-upside-down-investors-defy-fed-2023-2

2. “A Second-Half Stock-Market Rally Is Still in Play Despite Rout” BNN Bloomberg, 26 Feb. 2023, https://www.bnnbloomberg.ca/a-second-half-stock-market-rally-is-still-in-play-despite-rout-1.1888380

3. “CNBC Daily Open: Markets fall as the Fed shows no sign of pivoting away from interest rate hikes” CNBC, 22 Feb. 2023, https://www.cnbc.com/2023/02/23/stock-markets-the-fed-shows-no-sign-of-pivoting-away-from-rate-hikes.html

4. “CNBC Daily Open: Markets Fall as the Fed Shows No Sign of Pausing Interest Rate Hikes” NBC 10 Philadelphia, 23 Feb. 2023, https://www.nbcphiladelphia.com/news/local/cnbc-daily-open-markets-fall-as-the-fed-shows-no-sign-of-pausing-interest-rate-hikes/3506936/