In his Jackson Hole Symposium keynote presentation, Federal Reserve Chair Jerome Powell avoided conveying any strong message to the markets. Powell, in his speech, remained vague about whether the Fed would raise the federal funds rate again, though he warned that “additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

The Fed has raised its policy rate to its current range of 5.25% to 5.50% from being close to zero in March 2022. The next two meetings in 2023, on October 31–November 1 and December 12–13, are when the FOMC will be expected to lift the funds rate toward 6%.

Globally, investors are left in search of directions for the short- to medium-term. Vikas Lakhwani, chief revenue officer of CPT Markets, shares his view on Powell’s anticipated actions on Fed rates, impact on markets, and effects on the S&P 500 and Nasdaq 100 indices by the end of 2023 in an online interview with FE Online.

Given a robust job market and sticky core inflation, what according to you should US Fed Chief Powell be expected to do now?

The aggressive monetary policy that the Federal Reserve has put in place has been able to rein in inflation and direct it in a satisfactory trajectory for the last couple of months. This success has enabled the Federal Reserve to have more options and to opt for stopping interest rate hikes if necessary. On the other hand, the latest uptick in inflation could point otherwise. In this regard, the focus should remain on maintaining inflation in the right direction while balancing the impact on the economy to avoid a recession.

What could be the impact on markets with the federal funds rate reaching around 6%?

If interest rates continue to climb investors could increasingly favor treasuries and bonds to move toward higher yield and lower risk assets as the pressure on the economy could become ever more important with financing costs climbing further. In this regard, stocks and other risky assets could decline as risk aversion increases. Emerging markets could also come under pressure.

What are the chances of the US going into a recession?

The probability of seeing a recession in the US has been declining as the US economy remained resilient and the Federal Reserve seems to be near the end of its interest rate hike cycle. The strength of the US economy in the face of the rising interest rates has positively affected expectations and reduced the concerns about a hard landing. In this regard, the Federal Reserve has omitted a recession in the US from its forecasts.

What are the expectations regarding the Federal Reserve’s monetary policy?

There are strong expectations that the interest rate hike cycle has come to an end and that rates could remain at their current levels until the beginning of next year. Interest rates could start declining during the second half of 2024 if conditions remain favorable.
However, current estimates could change depending on the data on inflation and the US economy as a whole. At the same time, the Federal Reserve kept its options open and could raise interest rates another time if necessary.

Where do you see the S&P 500 and Nasdaq 100 reaching by the end of 2023?

The stock market could continue to see a strong impetus thanks to the resilience of the US economy as well as the strong growth prospects of the technology sector thanks to artificial intelligence. While the uncertainty around monetary policy and the high level of interest rates could continue to weigh on performance, both indices could continue to see a positive trend and could see a boost if inflation continues to decline at a satisfactory pace and the Federal Reserve’s next steps become clearer.