Just as he did in August, on Wednesday this week, the Federal Reserve chair talked tough on inflation, squashing investor hopes of a decisive pivot away from tightening monetary policy and knocking stocks to the lowest in more than a week. The S&P 500 Index fell 2.5% on Wednesday, the biggest decline since Oct. 7, after climbing by as much as 1% in the minutes after the Fed released its policy statement that suggested rate increases were entering their final phase. But Powell insisted, in the Q&A session, that central bank officials “still have some ways” to go before policy was tight enough, and that “it is very premature to be thinking about pausing.” The Nasdaq 100 fell by 3.4%.

The Federal Reserve has now raised the Federal Funds rate by 75 basis points to a range of 3.75% to 4%. But what took the market down was his comment during the Q&A session – “we may ultimately move to higher levels than we thought at the time of the September meeting”. The prevailing view was that there will be a pivot from the rate increases and that the Fed would pause around 4.5%, but with that comment, the prospect of a 5%+ Fed Funds rate environment spooked Wall Street and the sell off began. The sell off continued into Thursday. 

Future Wealth’s View

Just two weeks ago, in our report titled “The Markets are going to be wrong again”, we had stated that “We, at Future Wealth LLC, believe that the Fed, having lost all credibility and stating several times that they will be data dependent, is not going to pause interest rate hikes until “hard” data shows that inflation has come down to 2%. Which means it is a long road from current levels. We view the recent rally as a reflection of the optimism in investors and unfortunately, they are going to be burnt once again. Stay safe.” Link to the article is here – https://futurewealthllc.com/the-markets-are-going-to-be-wrong-again/

The Fed meeting this week has basically shut down any prospect of an meaningful recovery in the stock market for the rest of 2022. We will likely finish the year with the S&P down about 15% and Nasdaq down about 25%. The prospect of further rate hike increases the spread between the 2 yr and 10 yr treasury yields and narrows the chances of a soft landing, which means that a recession is almost inevitable in 2023.

Investors who chased the bear market rally over the past month got burnt this week. Those who heeded our advice and stayed in safe investments –  a “Thank You” would be appreciated.