Weekly Market Update: July 6, 2023
The Federal Reserve is expected to resume raising the benchmark short-term interest rate at this month’s Federal Open Market Committee (FOMC) meeting. Chairman Jerome Powell telegraphed this stance in his testimony before Congress last month. Several FOMC voting members also maintain that the benchmark federal funds rate needs to be raised at least twice more in 2023 and stay at that level for an extended period to effectively fight inflation. Chairman Powell noted that core prices, which exclude the food and energy components, remain stubbornly high.
Wall Street has not been in sync with the Federal Reserve’s thinking on monetary policy. Although the Street no longer expects the central bank to cut interest rates this year, analysts are not convinced that the Fed will hike rates multiple times after the expected July increase. Chairman Powell said the central bank will be “data dependent” in formulating monetary policy and, with overall inflation easing, the market thinks the central bank will eventually reconsider its hawkish position.
The economic data of late have been better than expected. This adds credence to the notion that the central bank can orchestrate a “soft landing” for the economy, as it likely nears the end of its most restrictive monetary policy course in four decades. Both homebuilding activity and auto sales rebounded in May, as the consumer continues to prove resilient, aided by a tight labor market. The strength of the U.S. consumer and labor market, though, makes the Fed’s task of pushing price growth down to its target rate of 2% more arduous.
The consumer has been the backbone of the economy. This may be put to the test later this year, as COVID-19 stimulus-enhanced savings accounts contract, and higher lending rates deter consumers from taking out loans, the latter of which is detrimental to growth. The economic picture overseas also bears watching, as China’s economy has yet to recover from COVID-19-mandated shutdowns and Germany, Europe’s largest economy, is in recession.
Conclusion: The Fed is still taking a hawkish stance on monetary policy, so we don’t think this is the time to throw caution to the wind. A well-diversified portfolio is recommended.