July 25, 2023
Good morning,
Markets have been preoccupied with the Fed since the beginning of its tightening cycle 16 months ago. It is no surprise then, that despite the beginning of earnings season, the S&P 500 Index has seen little change (<1%) since the Fed’s quiet period began over a week ago. Their quiet period ends tomorrow with their latest decision on rates (+25bps rate hike is a foregone conclusion) and the more important comments on future rate changes. It’s hard to imagine the comments being any different from the last meeting – decisions on rates in the future will be strictly data dependent on reaching a target inflation rate of 2%.
The idea that the Fed may be satisfied with inflation falling short of its target 2% is an optimistic narrative that seems to have crept into market pricing. I think it has played some role in the recent bullish behavior of stocks. This may be a bit of a trip wire for equities if Chairman Powell only reiterates what he’s been saying consistently for over 16 months – no blinking on 2%.
See you Thursday.
Be well,
Mike