Post-Fed Hangover

Stocks and bonds are selling off today following yesterday’s Fed announcement (see below). The Dow is off by about 350 points, the S&P 500 is down .7% and the Nasdaq is down .4%.

The Federal Reserve again raised its short-term policy interest rate by .25% as expected. This tenth consecutive rate increase brings it to a range of 5% to 5.25%. Conspicuously absent from the Fed’s statement was the familiar phrase warning that additional rate hikes may be necessary. Instead, it explained that the Fed would sit back and monitor developments to determine whether any additional hikes may be necessary. During the subsequent press conference Fed Chair Powell said, “You add up all the tightening…we feel like we’re getting close, or maybe even there.” Reading between the lines, this is the pause we’ve hoped for.

But have they already gone too far? Today’s big debate on Wall Street focuses on whether they should have paused two rate hikes ago. As the Wall Street Journal explains, “The Fed fights inflation by slowing the economy through raising rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices and a stronger dollar. The Fed is still worried about stubborn inflation, robust job gains and low unemployment.” But the other side of that coin is investor’s worry about slowing economic growth. Mr. Powell still says the Fed doesn’t forecast a recession, and that we will most likely avoid that negative outcome. This is the essence of the tug-of-war being played out in markets today.

About 400 of the S&P 500 companies have reported first quarter earnings and the aggregate results are fairly positive. Bloomberg News says, “…results have largely beaten estimates, and are projected to fall 4.5%” [from a year ago]. At the end of March, before the reporting season started, the estimate was about -8%.” Analysts have stopped reducing earnings forecasts, and have now begun to raise them. So while growth has slowed from last year, it looks as though most analysts had gotten too pessimistic.