There is certainly plenty to talk about right now, especially regarding the Federal Reserve and monetary policy. The Fed has taken center stage in the financial markets, with the developments coming out of its two-day policy meeting last week. The Federal Open Market Committee left its benchmark borrowing rate unchanged, at near zero. The Fed also maintained their aggressive bond-buying program at current levels – with monthly purchases of $120 billion in Treasuries and mortgage-backed securities. With this, the current accommodative policy remains in place. Remember though, markets are forward looking, and trade on what the future looks like.
The key takeaway from the Fed’s meeting last week was that interest rates will rise both sooner and faster than previously expected. Indications are now that the Fed will raise rates twice in 2023. Previous forecasts have been for no rate increases until 2024. Further, the Fed will likely reduce its bond buying program (tapering) sooner-than-expected as well. Chairman Powell stated in his press conference Wednesday afternoon “you can think of this meeting that we had as the ‘talking-about-talking-about’ (tapering) meeting,” and then suggested we “retire the term, which has served its purpose well.” So this was clearly a transitioning moment.
In other news from the meeting, the central bank raised their inflation expectation a full percentage point, to 3.4% for the year. The Fed also bumped up its economic growth forecast, and now sees Gross Domestic Product increasing 7%. Both of these foundational numbers depict an economy which is not in need of stimulus. Also market moving last week were comments by St. Louis Federal Reserve President James Bullard, who said Friday morning that it was natural for the Fed to tilt more “hawkish” given the inflation readings, with his input being that rate increases should start as early as 2022.
Bottom line, the market is starting to adjust to a tighter Fed policy, as well as the likely end of ultra-easy (stimulative) monetary policy – and volatility returned to the stock market. When it was all said and done last week, the Dow Jones Industrial Average fell over 1,200 points. The Dow registered its worst week since last October, falling 3.45% to 33,290.08. The NASDAQ Composite snapped its four-week winning streak, dipping .28% to 14,030.38. While the benchmark Standard & Poor’s 500 Index dropped 1.91% to 4,166.45 (ending its 3-week winning streak).
Looking to the week ahead, the markets will still be digesting the recent news from the Fed and adjusting to a new outlook on monetary policy. To a different area of interest, we’ll also get a few notable and diverse earnings reports to analyze. Paychex, Darden Restaurants, Nike, and FedEx are all scheduled to report their results this week. FedEx is considered an economic bellwether and their commentary often provides key insights into how the broad economy is performing!
All the best – Southport Station Financial Management, LLC