Markets React To Hawkish Fed
The Fed doused any hopes of a Santa Rally last week with hawkish language following their last meeting of 2022.
Despite the fact that the Fed’s official statement from last week’s meeting only differed by two words from the previous meeting, Fed Chairman Powell’s speech was more hawkish than the market expected. They raised the Fed Funds rate by only 50 basis points, compared to the four previous meetings where the raise was 75 basis points. Unfortunately, the comments from the Chairman provided room for more rate hikes and the Fed’s economic projections were downgraded, raising fears of a recession in 2023. And yet, the Fed’s new projections do not seem to add up as growth was revised lower and unemployment was revised higher.
This would signal a recession, but somehow the Fed’s inflation projection was revised higher.
Since recessions are “deflationary” in nature, it’s curious that the Fed would increase their inflation projections for 2023. Inflation has declined for 5 consecutive months, so it’s curious why the Fed would think inflation is headed higher. Jobless Claims improved last week, giving investors reason to fear further rate hikes. We’re in the “good news is bad news” cycle, so markets may be shaky in the short-term.
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