Markets Rally After First Fed Meeting of 2023
February 1, 2023
In many ways, the Federal Reserve’s post-meeting communications today were what we expected. The committee voted unanimously to increase the Fed Funds target range by 25 basis points to 4.5%-4.75%. This is the second consecutive meeting where the committee opted to moderate its pace of tightening after increasing the target range by 50 basis points in December, following increases of 75 basis points at each of the previous four meetings. With this increase, the pace of monetary policy tightening has returned to the historical norm. This is the thirty-seventh 25 basis point increase in the last thirty years.
We also expected policymakers would push back against the market expectations for a pivot toward more accommodative monetary policy later this year. The post-meeting statement from the committee noted that “inflation has eased somewhat but remains elevated” and suggested that multiple additional rate increases would be necessary this year before reaching the terminal rate of this hiking cycle. This implies at least one more rate hike this year than the pre-meeting market consensus and our own outlook.
During Fed Chair Jerome Powell’s press conference, we expected he would try and deliver a hawkish message to align the market outlook with the committee’s. He was given an opportunity to do so almost immediately when asked about the recent easing of financial conditions, which has been driven partly by expectations for a Fed pivot in the near future. The easing of financial conditions is not a trivial matter. It is supportive of economic activity and could mute the impact of the Fed’s 450 basis points of cumulative interest rate increases over the last twelve months.
We saw this as an opportunity for the Chair to suggest that easing financial conditions was out of step with the committee’s outlook for monetary policy. Instead, Powell focused on the fact that financial conditions are tighter today than they were when the Fed began tightening monetary policy. While that’s true, it communicated to the market that the Fed is untroubled by the recent trend.
Later, he was asked if the most recent Summary of Economic Projections (SEP) released following the December FOMC meeting was still the best guide for the committee’s outlook for the economy and policy. Powell replied that the committee would be compiling its next round of forecasts for the next FOMC meeting in March. This seemed to discount the current value of the December SEP and, but proxy, the 5.1 percent median forecast for the Fed Funds rate at the end of this year.
Finally, when asked if the committee had discussed when it would be appropriate to pause the rate hike cycle, Powell side-stepped the question and said that the meeting minutes would be released later this month. It is not unusual for the Chair to generally summarize what the committee discussed during the meeting during their press conference. To us, Powell’s reluctance to do so suggests that the committee discussed pausing rates and that Powell wanted to avoid saying so because of the dovish sentiment it would communicate.
Whatever Powell hoped to accomplish, markets took a dovish message from the press conference. The S&P 500 ended the day up just more than 1 percent. The tech-heavy NASDAQ finished up an even 2 percent. Yields declined broadly across the Treasury yield curve. It’s possible that we are wrong. Perhaps, Powell delivered the exact message to markets that he intended: despite continued labor market strength, inflation is falling faster than the committee expected. We’ll have a better sense in a couple of weeks after other members of the committee have had an opportunity to make their own public comments.
David Allen, CFA, CFP
Chief Investment Officer
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