Do not fight the Fed remains the most important golden rule for global investors. The actions and policies of the Federal Reserve have a considerable impact on the economy and financial markets. In order to make informed investment decisions, investors must comprehend and anticipate the Fed’s actions.
The Federal Reserve increased interest rates by a quarter point, bringing the benchmark lending rate from 5.25% to 5.50%, the highest level since 2001. This hike came as no surprise to investors who had already factored in the possibility of such a move.
Ultimately, the Federal Reserve is attempting to orchestrate a soft landing following a period of high inflation and rate hikes. Meanwhile, this year, the S&P 500 Index has risen 19%, while the tech-heavy Nasdaq 100, on the back of the AI boom, is up by almost 50%, luring investors off the sidelines and into the market. Before the FOMO (Fear of missing out) hits, investors should remember that historically, August and September tend to be the S&P 500’s worst two months of the year.
Here are some market voices touching upon not only the current dynamics but also the route ahead for the US Fed, and markets.
Subho Moulik, CEO, Appreciate, a fintech platform for savings and investments
After ten consecutive rate hikes and a pause in June, the Federal Reserve has now hiked rates again by 25 bps. As a result, the federal funds rate is now at its highest level in 22 years. But it looks like the economy is going to be okay.
The US economy has been resilient despite high inflation and tightening monetary policy. The unemployment rate is near record lows in half of US states, and consumer confidence is at a two-year high. Moreover, stocks have been doing surprisingly well, with Wall Street defying the pressures of what has been the fastest hiking cycle in about 40 years.
Given these encouraging factors, economists now think a soft landing is more likely than the alternatives, which is one of the reasons the Fed doesn’t seem too worried about pushing rates up. Although inflation is gradually cooling, it still remains far above the Fed’s 2% target.
The Fed’s rate hike, however, will force central banks around the world to also bump up interest rates to avoid currency depreciation risk, as the flow of capital to higher-yielding US assets might weaken their currencies.
Raghvendra Nath, Managing Director, Ladderup Wealth Management
The key events to look out for in the market and FED would be two job reports and two reports on consumer price inflation. Swap market pricing indicates a 50% probability of another rate hike before the FED’s tightening cycle ends. A sustained easing in price pressures over the coming months would be necessary for the FED to put a stop to this tightening.
Kavan Choksi, a successful investor, business management, and wealth consultant at KC Consulting
Additional hikes will be dependent on data like the CPI and jobs reports but are likely. Whether another rate hike is necessary or if a pause is appropriate, depends on data such as the CPI and jobs reports. Given that inflation continues to be elevated and job gains are robust, the current forecast of another hike in September or October could completely change.
José Torres, Senior Economist at Interactive Brokers
While the circuitous path out of the forest of inflation appears to have widened, Powell and his fellow policymakers aren’t out of the woods yet with the Beyoncé Blip and corporate earnings calls illustrating that demand for travel, dining out, and entertainment can potentially support inflation in the services sector while commodity prices are climbing.
Google searches for nail salons in cities where Beyoncé is performing have soared as fans that have paid hundreds of dollars for concert tickets prepare to get decked out for the events, while Philadelphia recently had its strongest post-pandemic month for hotel room bookings when Taylor Swift announced she would perform there.
The longer-term future for consuming spending, however, is unclear, as Americans have likely spent most of their pandemic savings. Ideally, a moderation of consumer spending could help slow down inflation, but if Americans’ spending drops dramatically, the employment mandate will likely resurface.
Viram Shah, Co-founder & CEO, Vested Finance
The future actions of the Fed, particularly in their next meeting in September, are dependent on the economic data. Investor sentiment remains largely unchanged, with continued interest in tech stocks evident from sustained trading volumes and values. In terms of individual stocks, there has been a resurgence in interest in Alibaba and Coinbase. Furthermore, LVMH has also attracted attention following its strong Q2 results. Despite a decline in its stock price of LVMH, the high buying volume indicates that investors have expressed increased interest in this particular stock.
Ruslan Lienka, Chief of Markets at fintech platform YouHodler
I think the current level of rates will last at least until the middle of 2024 and this still could not be priced by the market. In general, the financial industry should be prepared for such turbulence after the financial crisis of 2007-2008, while the main concern is actually about non-financial companies, many of which have never experienced long periods of high borrowing costs before.”
Gagan Singla, Managing Director of Blinkx, an initiative by JM Financial
Jerome Powell in his post-policy conference remarked that “The Fed would now hike rates only if the macros really warranted”. Fed members interpreted the remark as a data-driven approach, but markets are interpreting it as the Fed rate peak for this round. Even CME Fedwatch is indicating a low probability of 25% of another rate hike this year. However, the Fed chair has been emphatic that there would be no compromise on inflation targets and rate cuts were not likely before 2024.
Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund
The statement suggests that future actions will be data-dependent. If inflation moves above the Fed’s expectation, it will hike rates. If it remains on the expected declining path, the Fed will pause. The policy outcome was broadly in line with the market expectation. Thus there was no material impact on the bond markets.
We maintain our view that the rate hiking cycle has either been completed already or is very close to its end. In the US, the current level of interest rates is significantly higher than their normal levels in the past 20 years. Thus, there is a high probability of rate cuts sometime in 2024.
Abhishek Bisen, Head of Fixed Income & Fund Manager, Kotak Mahindra Asset Management Company
In order to ensure financial conditions do not ease prematurely, Federal Reserve continues to guide that further monetary actions will be data-dependent. In our assessment falling core inflation in the month ahead will headline inflation at nearly 3% handle, which will give comfort to FOMC to stay on hold for the rest of CY 2023.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS
The US Federal Reserve’s increase in interest rates by 25bps was on expected lines, but more importantly, the commentary and press conference were largely neutral. Considering the massive rate hike cycle in place and inflation challenges reducing, more rate hikes are not needed at this juncture. Further rate hikes could be detrimental to economic growth prospects raising the chances of a hard landing. So, the interest rate cycle has largely peaked, but its impact will be seen in the forthcoming quarters.
Ghazal Jain, Fund Manager, Quantum AMC
Unlike last time, the Fed did not give much forward guidance on the monetary policy path. It seems the softer US inflation readings for June positively weighed on their decision. Powell used the words “data dependent” when asked about the September policy. Further easing in the monthly core inflation numbers for July and August could very well make this the last rate hike in this tightening cycle. On the other hand, any negative surprises on the inflation front could mean more rate hikes.
Powell again ruled out any rate cuts in 2023 which capped the upside in gold. With policy set to be restrictive for the foreseeable future, we can expect gold prices to largely remain range bound. Despite the “higher for longer” rhetoric, a sustainable drop in inflation along with a slowdown in US growth should lead the Fed to cut rates in the first half of 2024. A rate cut will result in a structural up move in gold prices.
Adam Taggart, CEO & Founder of Wealthion, a fast-growing, digital financial media property
Powell is over-tightening and making a looming recession deeper and more prolonged than necessary. I think this hubris could lead to an inverse of the past 2 years. For many years, the Fed complained inflation was “too low” until suddenly its policies created way more than it wanted. I think the same could happen in the other direction given the Fed’s current hiking/tightening and (over)confidence in its rescuing abilities.