As expected, the Fed raised rates by another 75 basis points (0.75%) last week, bringing the total increase to 2.25% so far this year. Federal Reserve Chairman Jerome Powell did not provide any guidance as to what the Fed will do at its next meeting, which takes place in September, saying instead they will refer to the data. However, he did state the Fed was committed to bringing inflation down to a 2% level. He also denied we would be in a recession if we had a negative reading for the second-quarter GDP (which we did).
The market took the lack of guidance as a signal the Fed will not increase rates in September and rallied hard into the close on Wednesday. The rally continued to end the week, despite the confirmation we are officially in a recession. The markets clearly don’t respect the Fed and feel it is squeamish about going further with rate hikes as the economy heads deeper into recession.
That may be good news for the stock market, but it will not help tame inflation. With 2.25% in rate hikes so far this year and a stated 2% target inflation rate, the math shows we would need the Fed to increase another 4.5% to combat inflation, which is running at 9%. If they stop here, we can expect inflation to sit at about 7%. Ultimately, that will filter down to companies’ bottom lines and shares will likely tumble once more. As it is, markets have been ignoring what otherwise would be cautionary news in the most recent round of earnings and continue to rally on the hopes the Fed will stop because we are in a recession. But as we discussed earlier, policymakers do not appear to be acknowledging the situation. Is Chairman Powell looking for the slowing economy to lower inflation? That could be a tactic, but it is a risky one that might prolong the recession while inflation remains stubbornly high. For now, the markets appear to have no fear of the Fed.