The Federal Reserve did what virtually all of Wall Street had anticipated yesterday: It raised key interest rates by 25 basis points.
However, that’s not the big news.
The big news was the Federal Open Market Committee (FOMC) statement.
So, in today’s Market 360, we’ll review the FOMC statement and Federal Reserve Chairman Jerome Powell’s post-meeting press conference comments. Plus, I’ll share what you should focus on next now that the FOMC meeting is behind us.
The Fed Turned Dovish – Here’s Why Investors’ Still Panicked…
As I said, the Fed raised key interest rates by 25 basis points. This brings the federal funds rate to 4.75% to 5% – the highest level since October 2007.
A 25-basis-point increase was widely expected by Wall Street, so the market was mostly unchanged following the hike.
Instead, it was the FOMC statement that got stocks moving.
You may recall in my Market 360 last week, I shared there were two things I was looking for in the Federal Open Market Committee (FOMC) statement:
- The Fed’s Tone – A pivot to a dovish tone would indicate we are coming to an end of this rate hike cycle.
- The Dot Plot – Every other meeting the Fed releases its dot plot survey. The dot plot shows us where the Fed sees rates in the coming months.
The FOMC statement noted that inflation remains high and that the Fed remains “highly attentive to inflation risks.” And in reference to the bank situation, the FOMC also stated:
The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.
That said, there was one important phrase missing from yesterday’s statement…
“We’re going to have ongoing rate increases” was nowhere to be seen.
Furthermore, the Fed’s “dot plot” survey showed no change from December 2022 – with the medium/high at 5.1%. In my estimation, we’re already in that range.
What Wall Street needed was for the Fed to restore investors’ confidence – and the first step to do that was to signal that it has enough evidence that it can start to tap the brakes.
In other words, Wall Street needed a dovish Fed, and that’s what it finally got yesterday.
Now the Fed can set its sights to un-invert the yield curve to relieve the stress on banks.
While the major indices started trending higher following the FOMC statement, Fed Chairman Jerome Powell brought stocks crashing back down during his post-meeting press conference.
As Powell inferred during his press conference, there continues to be “so much uncertainty” – and while the dot plot remained unchanged, some additional policy firming may be needed.
And when asked by reporters if investors can assume that rate hikes are coming to an end, Powell replied:
Policy’s got to be tight enough to bring inflation down to 2% over time. It doesn’t all have to come from rate hikes; it can come from, you know, tighter credit conditions…
We’re just going to have to watch. In the meantime… we will do enough to bring inflation down to 2%.
No one should doubt that.
He also noted that historically you can’t get high inflation under control without “a long series of years where inflation is high and volatile”… where it’s hard to invest capital and it’s hard for an economy to perform well.
The fact is, Powell gave no hard answers, just a lot of doublespeak that equated to “maybe” and “we’ll see.” He almost sounded like a parent answering a child who is begging for a trip to Disney World!
And, as you know, if there is one thing the markets hate most, it’s uncertainty.
The fact that Powell refused to definitively say that the Fed was ending its aggressive rate hike policy spooked investors, triggering a broader market selloff. By Wednesday’s close, the S&P 500, Dow and NASDAQ were down 1.65%, 1.63% and 1.65%, respectively.
However, stocks resurged with a vengeance in early morning trading, driving the S&P 500, Dow and NASDAQ up more than 1%.
And even better: This was an extremely broad-based rally.
Despite Powell’s stumbles, we have a lot to be optimistic about right now. With the federal fund rates now sitting between 4.75% and 5%, the Fed simply has no reason to raise rates any further.
So, I’ll say to you exactly what I said to my Growth Investor subscribers yesterday: It’s time to celebrate!
As always, the best way to do that is to invest in stocks characterized by robust forecasted earnings and sales – which is exactly what I recommend in Growth Investor.
Those are the stocks that should bounce back strongly from this recent bout of weakness and should perform well in the upcoming earnings season.
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