Back to top

Image: Bigstock

Markets Up on Fed Speak & Interest Rate Forecasts

Read MoreHide Full Article

In the near-term, even if only for a day, the bearish headlock on the stock market has been broken. A big upswing across major market indices filled in some of the deep crevices we have established since Fed Chair Jay Powell’s spookily hawkish speech from Jackson Hole, WY two weeks ago Friday.

The Dow gathered +436 points, or +1.40% on the day, and it was the worst-performing major index for the session. The S&P 500 saw 10 of 11 sectors close higher for its best day in nearly a month, +1.84%. The Nasdaq stopped its longest losing streak (seven days) in three years, finishing near session highs, +2.14%. The small-cap Russell 2000 takes home the prize today: +2.23%.

We saw a new Beige Book from the Fed out today, two weeks prior to its next monetary policy announcement, and results were pretty much as expected: a “generally weak” economic outlook, led by higher prices and a tight labor market, is countered somewhat by inflation showing signs of decelerating. The Fed expects demand to continue softening for the next six to 12 months, which puts an informal time line on how much longer Fed policy will need to be kept taut around the domestic economy.

Fed Vice President Lael Brainard also addressed a crowd in Washington DC today, where she stressed the Federal Open Market Committee (FOMC) remains committed to fighting inflation, which will take “a few months” before it will be clear the extent the FOMC needs to go. She was careful to state the Fed ought not “overdo the tightening,” in order to successfully staunch inflation but not dig us into recession.

Thus, 6-12 months from the Beige Book, “a few months” from Brainard — we’re looking at continued hikes through the end of 2022, with a possible pause three, six or 12 months from now. If it’s already a given that a 75 basis-point (bps) hike is coming two weeks from today, that takes us to 3-3.25% on the Fed funds rate. There are still two more meetings for the FOMC through the end of the year — November 2 and December 14 — so perhaps some combination of another +50 bps gain might be expected, depending on economic data, which would bring us to 3.5-3.75% interest rates by the end of 2022.

Of course, there are any number of monkey wrenches that might find themselves tossed into the machine from now until then, including dire prospects for European heating supplies over the winter months based on Russia’s latest strategy to wrest lifted sanctions from the West over its war of aggression in Ukraine, which now roils toward its seventh month. And China has just undergone a fresh Covid shutdown, hampering supply chains to the West that have aggravated economic growth the world over.

Questions or comments about this article and/or its author? Click here>>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Invesco QQQ (QQQ) - free report >>

SPDR S&P 500 ETF (SPY) - free report >>

SPDR Dow Jones Industrial Average ETF (DIA) - free report >>

Published in