At present was Fed Determination Day, and buyers had been upset. No particular pause in rate of interest hikes, however possibly just a bit trace.

As anticipated, the Fed raised rates of interest by 25 foundation factors. This brings rates of interest to the 5.0%-to-5.25% vary. The final time charges had been this excessive was in 2007.

A Little Cooling, however Not Sufficient

It should not come as a shock that the primary purpose behind the Fed’s resolution was that, although financial enlargement within the US has moderated, total, inflation remains to be elevated. Plus, job beneficial properties are nonetheless sturdy and unemployment remains to be low.

In line with Powell, the tempo of financial development this yr continues to be modest, although shopper spending is robust. There are indicators that provide and demand within the labor market are transferring in direction of being extra balanced, however there’s nonetheless a variety of extra demand.

The Fed continues to be dedicated to deliver inflation again to its 2% stage. It is vital to realize worth stability as a result of, with out it, the labor market will not attain a stage that can profit everybody.

An even bigger concern amongst buyers is when and if the Fed intends to pause rate of interest hikes. Whereas Chairman Powell did not say that the Fed would pause elevating charges, he did take away the language of anticipating charge hikes. This was a change of tone from earlier statements however, total, his feedback had been noncommittal. The door is left open for additional charge hikes if it is warranted. All of it will depend on incoming knowledge. Powell did say that inflation is prone to come down; if that occurs, there’s an opportunity the Fed will pause elevating charges.

However the Chairman’s feedback weren’t sufficient to ignite a bullish response from the inventory market. Perhaps the market was on the lookout for extra of a particular assertion as an alternative of the “inflation remains to be above 2%, and we nonetheless have an extended option to go earlier than we get there.” Chairman Powell’s feedback nonetheless had a hawkish tone.

The Market’s Response

The broader indexes closed decrease and all 11 S&P sectors closed within the pink. The S&P 500 index ($SPX) fell 0.70% to shut at 4090.75. Not precisely the course buyers had been hoping for, and it continues its uneven motion.

CHART 1: S&P 500 INDEX FALLS AFTER FED’S PRESSER. The S&P 500 continues its uneven sideways transfer.Chart supply: StockCharts.com. For illustrative functions solely.

However gold costs rose. Gold costs have been rising since November 2022. After reaching a excessive in April, gold costs pulled again. However the final two days noticed gold costs rise. Might this be an indication of flight to security?

 CHART 2: GOLD PRICES RISE. Is that this an indication of flight to security? It is value maintaining a tally of gold costs.Chart supply: StockCharts.com. For illustrative functions solely.

A key level is how charge hikes have impacted the regional banks. Despite the fact that Chairman Powell commented that the US banking system is sound and resilient, the upper mortgage charges scale back demand for loans and improve legal responsibility prices for the banks. This places a dent in a financial institution’s income. Elevating rates of interest additional might make it harder for banks, and we might see extra troubled banks floor. This might lead to a decline in shopper spending and a slowing of financial development.

And let’s not overlook the debt ceiling. Though Powell did not say an excessive amount of about this, he did say that, if the debt ceiling is not raised in a well timed method, there might be hostile penalties.

So there are nonetheless a variety of uncertainties within the financial system that are going to be mirrored within the inventory market’s worth motion. However the CBOE Volatility Index ($VIX) remains to be beneath the 20 stage, which signifies that buyers are complacent.

The Ultimate Phrase

Fed Chairman Powell’s feedback did not do a lot to excite the markets. The consolidation continues within the fairness markets till the following important occasion. What that is going to be is anybody’s guess.

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.