Fed Surprises The Market
Both equities and fixed income assets dropped last week in response to a hawkish Fed rate announcement. The Fed announced a 75 basis point hike for the Fed Funds Rate last week as expected.
What was less expected was the hawkish tone and change in the Fed’s “Dot-Plot.” The “Dot-Plot for future rate hikes increased from a mean top-end rate of 4.5% to 4.6% based on the latest poll of the Fed members. This caused the market to sell off. However, in addition to the higher Dot-Plot, the Fed’s updated projections showed lower GDP forecasts (0.2% vs 1.7%).
The Fed shifted Unemployment higher (4.4% vs. 4.0%). The Fed also doesn’t see inflation returning to its 2% target until 2025. This stands in stark contrast to pushing the Fed Funds Rate higher than expected. If the projections are lower, that would mean the economy is slowing down (i.e., lower inflation), so why the need to push rates higher? In typical fashion, the Fed is getting overly aggressive in the current rate hiking cycle, and could very well push us into a deeper recession (as has been the case historically).
The economic data last week was actually not bad, and in some cases, slightly improving.
Weekly Jobless Claims and Continuing Claims have fallen over the past few weeks. Weekly Claims have dropped to June levels and Continuing Claims are near June’s low. The U.S. consumer has been resilient throughout 2022. The Retail Sales data released a couple of weeks ago showed positive growth and the Redbook year-over-year sales have not fallen off a cliff like in past recessions. This week will tell us a lot about more about the consumer and the state of manufacturing in the U.S. Expect markets to remain volatile this week as the Fed trots out multiple members to speak throughout the week.