Big week for markets: Our take on the Fed, GDP and earnings
By: Edward Jones
1) The U.S. economy is slowing, as evidenced by the GDP data, Fed commentary, and earnings results;
2) The Federal Reserve may now start to hike rates at a more gradual pace; and
3) Markets did a lot of work to the downside ahead of softening economic and earnings data.
Had financial markets not been down substantially this year, there may have been more volatility this week, but with the S&P 500 Index down over 17% and the Nasdaq down close 24%, markets perhaps de-risked and set a lower bar ahead of the data1.
The July Fed meeting confirmed that future rate hikes will be data-dependent
As expected, the Federal Reserve raised rates this week by 75 basis points (0.75%), bringing the benchmark fed funds rate to about 2.5%. Fed Chair Jerome Powell noted in his commentary that the fed funds rate is now close to the Fed's estimate of a neutral rate, indicating an official end of the post-pandemic easy money policy1. Perhaps more importantly, Powell referenced a fed funds range of 3.0%-3.5% by the end of the year. This would imply about 50-100 basis points more of tightening over the next three meetings this year, which means the pace of rate hikes could slow. (Markets currently anticipate a 50-basis-point hike in September, followed by two 25-basis-point hikes in November and December)1. Markets, of course, cheered this notion of a more gradual Fed, with equity and bond markets closing sharply higher on Wednesday.
However, Chair Powell also was clear to emphasize that the path of the Fed would now be data dependent. And the key piece of data that it is tracking is inflation, both headline and core inflation. While the Fed acknowledged some softening in commodity prices lately, it also noted that areas like energy prices are more volatile, driven in part by external factors like the crisis in Ukraine.
Sources: 1. Bloomberg
Edward Jones - Mae Luchetti