In a typical week, a .25 point interest rate cut by the Federal Reserve would likely be the top economic story in the United States. This was not a typical week.
The Election and Interest Rates
Jobs > Inflation
In what is commonly known as their dual mandate, the Federal Reserve is charged by Congress to effectively promote both maximum employment and stable prices in the U.S. economy.
Tale of the 10-Year Treasury
A sense of excitement often marks the 4th of July as millions of Americans celebrate with a day full of festivities, reflection and national pride. This holiday kicks off July with a bang and sets the tone for a month filled with what we all enjoy – fun in the sun! Equities have taken center stage, the “bang” investors sought this year.
S is for Shrinkflation
Over the last month, the term Shrinkflation has become more popular in the media. The term was broached by President Biden during a Super Bowl interview earlier this year, but has been gaining traction more recently (see chart below on Google search trends) due to a proposed bill in Congress, as well as Sesame Street’s Cookie Monster complaining on X (formerly Twitter).
More Gas, Same Brakes
This past week’s plethora of economic and market-moving data, especially regarding interest rates, has served to highlight the sometimes-conflicting forces at work in the U.S. economy. While the Federal Reserve maintained their interest rate policy at 22-year highs on Wednesday, we also learned the U.S. government’s budget deficit grew to nearly $2 trillion in their most recent fiscal year.
Rates and Rates
The 10-year U.S. Treasury touched 5% earlier this week, the first time since 2007. By the end of the week, yields had settled at 4.9%, representing a significant increase from the rates of 3.7% on January 1. In the world of “bond math,” bond values fall when rates rise. Therefore, bond returns, as measured by the Bloomberg Aggregate Index, are down over 3% this year.
No Blinking in the Tetons
The major event in the capital markets this week took place Friday morning in Jackson Hole, Wyoming. Every year, Federal Reserve Bank leadership meets for a conference to discuss current and future policy. Ahead of today’s meeting, some investors had been optimistic that Powell would soften his stance on the pace of tightening.
We Have Liftoff
On Wednesday, the Federal Reserve lifted their key interest rate by 0.25% in the first of six expected rate hikes for this year, and possibly another four proposed increases in 2023. Federal Reserve Chair Jerome Powell had indicated that this increase was coming. So, when the stock market rose on Wednesday in response, it was less about the rate hike itself and more about Powell’s language associated with the move.
Return to Ordinary
In our Outlook 2022 publication titled "Extraordinary to Ordinary" we highlighted that more volatility would be a feature of 2022. Volatility was extraordinarily high in 2020 during the zenith of the COVID-19 crisis and well below average during the robust economic recovery of 2021. This year we expect an environment of more normal volatility.
Laboring Along
Federal Reserve Chair Jerome Powell’s speech at last month’s Jackson Hole Economic Symposium focused market participants on the labor market ‘speedometer’ that will determine how much and for how long our central bank will maintain its current stimulus measures. The Fed has set a high bar for achieving ‘substantial further progress’ towards full employment.
Soundproof Markets
All eyes were fixated across several facets of policy this week: the U.S. military withdrawal and civilian evacuation in Afghanistan, the much-anticipated bargaining in Congress to pass the budget resolution and lastly Fed Chair Powell’s comments regarding the plans for removing the extraordinary accommodation put in place during the pandemic-induced recession.
Are We There Yet?
“Are we there yet?” is a familiar back seat refrain that often occurs during long, summertime road trips involving bored children and their beleaguered parents. As we transition through our second COVID-affected summer, this frustration is also felt by investors and other market participants who long for some return to “normal.” Surely, we must all be there by now, right?
Breakthrough Earnings
A week that began with the sharpest pullback in equities since last fall concluded in remarkable fashion, as investor concerns about the economic repercussions of rising COVID-19 infections gave way to an increasingly constructive second quarter earnings season.
TINA and the Death of the Phillips Curve
Is Federal Reserve chair Jerome Powell taking a shot at the Phillips curve? His announcement this week at the virtual Jackson Hole conference revealed that the focus of Fed policy is shifting to be more on maximizing employment and less on the 2 percent inflation target they have had since 2012.
Baby Steps
All 50 states have now taken steps to re-open according to the Wall Street Journal. While still devastating in magnitude, many high-frequency and leading economic indicators may be past their “worst-ever” levels, showing slight improvement from their recent and historic lows.
White Knuckles
The rollercoaster ride continued this week as stocks moved at least 2 percent every day; however, with all of that volatility the S&P 500 was up 1 percent.
To Q.E. or Not to Q.E.
Federal Reserve Chair Jerome Powell announced this week that the central bank will once again be purchasing U.S. Treasury securities, reversing the recent trend of allowing its balance sheet to shrink. Immediately, many market participants experienced déjà vu, recalling the first time this monetary policy tool was implemented in 2008.
Feeling the Summer Heat
After rising in lockstep for most of this year-to-date, stocks and bonds moved in dramatically different directions after a week chocked full of market moving developments.
Why Cut?
Federal Reserve Chair Jerome Powell and other members of the rate-setting Federal Open Market Committee (FOMC) have signaled they will be cutting the benchmark federal funds rate at the end of this month. This will be their first interest rate cut since December 2008.
0-for-7
While yesterday was Major League Baseball’s Opening Day, this week’s 0-for-7 statistic unceremoniously belongs to the Federal Reserve for failing to achieve its 2 percent inflation target since it was established seven years ago.