Rate Hikes on Hold, More to Come?
The long-awaited hiatus in rate hikes was announced by the Fed on June 14. Chairman Powell’s statement that followed lifted the curtain a bit on sentiment within the Board regarding future rate projections. There are some voting members who favor at least two more increases in the Fed Funds rate by year-end, followed by a pivot to lower rates in ’24 and ’25. It appears that group is part of the “2% inflation now” crowd who seemingly favor a Tactical approach to corralling inflation and are willing to accept recession as the path to achieving price stability. We remain in support of the contingent who will evaluate the incoming data and cast their vote meeting by meeting. Thankfully, data dependency persists for those who favor a Strategic approach in attaining below-trend growth in pursuit of price stability.
Investors should accept this as a suspension of rate hikes, allowing for lagging economic data to catch up and reflect the full effects of the Fed’s actions. It would be a mistake to view the battle won at this point. Powell indicated that it will be a long haul to return inflation to the 2% mandate and that nearly all members entertain the likelihood of an additional rate hike or two. The uncertainty of data lag raises the possibility that there might appear to be a stall in the decline of inflation that could prompt a hawkish response from the Board. Some media types are hyping the likelihood of that happening as soon as the July 26 meeting. We have our doubts since there are fewer than a handful of meaningful data releases remaining prior to that meeting.
The recent personal consumption and ISM manufacturing releases are supportive of the Fed on Pause and we’re of the opinion that it would require a surprise in the remaining data to tip a majority of voting members toward a July rate increase. No doubt, inflation is sticky and that explains why all options remain on the table for the Fed. While that raises the possibility of higher rates, we see it likely that they will maintain their balanced approach to intervening only when the data points in that direction. We don’t see that happening this month without a significant surprise in this week’s employment report or Consumer and Wholesale price data announced next week.
Investors have seen an upward shift of the current trading range in the market rather than a broad, bullish breakout to the upside. The advance has been fueled by a small number of mega-cap, tech, and digital communications companies riding the “AI” (Artificial Intelligence) wave to questionable, and perhaps unsustainable, valuations. Breadth of the rally we saw in Q2 has never been so narrow. We believe, absent an event, the bear market low of October has been established, regardless of where the Fed takes interest rates. With the Fed on Hold, the focus should shift to earnings expectations for the second half of this year. The first half is estimated to show a small year-over-year decline while the second half is forecast to take CY2023 earnings to a modest 1 to 2% increase over last year. It will require a much-needed broadening of support from other sectors to meet that forecast. Stay tuned.
Views expressed are as of the date indicated and are not intended to serve as investment advice, tax advice, a recommendation, offer, or solicitation to buy or sell any securities; they are based on the information available at the time and are subject to change based on economic, capital market, and other conditions. Any investment decision should be based on an individual’s own goals, time horizon, and tolerance for risk.
Prior performance does not guarantee future results and there is the potential for the loss of your capital investment.
Information and data provided have been obtained from sources deemed reliable but are not guaranteed.
