Feb. 6, 2023
The Federal Reserve is at odds with the market.
That was one of the big takeaways from the Fed’s recent meeting. Last Wednesday, central bank policymakers raised rates again, though not as much as they have the last few times.
That much was expected.
And in pushing up the rates, Chairman Powell reiterated that the battle was not yet won and stated that he does not expect to cut rates any time this year.
That goes against what many analysts thought would happen.
It was believed that this recent meeting would be the last rate raise and the meetings to come would begin to roll out gradual rate cuts.
But Powell wasn’t ready to commit. In his mind, inflation is still running hot and he has committed to making sure the Fed does everything possible to get it completely under control.
There has been a growing amount of sentiment lately that things are getting better and that the recession may not be as bad as many first feared. But Chairman Powell didn’t appear to let that growing sentiment impact his decision.
He did concede that it looks as though “the disinflationary process has started.” If inflation’s fall accelerates, he admitted that would influence any future decision-making the Fed announces at future meetings.
Primarily, he’s watching the labor market to see how things shake out there. The job market is still strong and he expressed concern that wage growth was too fast and, thus, fanning the flames of inflation.
Workers are making more, but those higher labor costs are being passed down to consumers. Because of that, inflation will remain stubborn and Powell and company will continue saying no to rate cuts for the time being.
With last Friday’s jobs numbers being stronger than expected, the chairman’s resolve might be strengthened. 517,000 jobs were added. Even though wage growth slowed somewhat, unemployment came in at 3.4%, the lowest since 1969. These things give the chairman the ammo he needs to stay the course and justify continuing with rate raises.
The tepid dual nature of Powell’s speech was welcomed by Wall Street. Stock prices and bond yields went up after the speech on Wednesday and throughout Thursday. Investors were confident these rate hikes won’t be around much longer, despite Powell’s insistence otherwise.
He was careful not to say anything to throw cold water on the party, but continued to warn that his job was to focus on “sustained changes” in the market.
So the central bank and Wall Street are at odds. The former says there’s still much more to do, but the latter thinks it’s time to bring the punch bowl back out because the good times are here again.
It’s going to take time to see who’s right. We’re currently in the midst of a massive wave of layoffs in the tech industry that haven’t yet affected the labor numbers. So there’s still some uncertainty about just what the Fed faces in the coming weeks.
By the time the next meeting happens in March, the Fed will have more data to inform its decision-making. At that point, we’ll have a clearer picture of what Jerome and company plan on doing.
In the meantime, his talk of disinflation could be to your advantage. Sentiment is high following his comments, which means people are making money in the markets.
You can do the same by buying into the right sectors.
No matter what kind of market we’re in, there are strategies to not only protect your wealth, but to thrive.
When you know what to look for and what to avoid, you can profit no matter what the market forces are doing.
Editor, Daily Profit Cycle