Federal Reserve Bank of Atlanta President Raphael Bostic said on Thursday that the central bank could be in position to pause the current tightening cycle by mid to late summer. He favors a 25 basis points rate hike in March. The markets celebrated. The three major stock market indexes rose for the week, with the Dow Jones adding 1.7% to snap a four-week losing streak, the S&P 500 closing 1.9% higher, and the Nasdaq gaining 2.6%.
But, on Friday, economic data showed better than expected demand for services in February, new orders rose to the highest level in more than a year, and hiring increased. Now, there is no way for Mr. Bostic to recant his comments.
The Federal Reserve’s mission to tamp down inflation is ever more likely to mean a higher peak interest rate than investors had been expecting just weeks ago, thanks in part to a labor market that continues to defy expectations and the Fed’s credibility will take a hit at the next interest rate hike decision if backpedals from its soft stance of 25 basis point hike.
Future Wealth’s View
In our report a few weeks ago, we had stated that we expect the Fed to raise interest rates by 50 basis points in the March meeting. The strength of the economy demands it, we argued. Post Bostic comments, the Federal Reserve is facing a loss of credibility no matter what policy decision it makes at its March 22nd meeting. If it stays with a 25 bps hike, investors will argue the Fed is simply disconnected from the reality on the ground with respect to inflation and if it goes with a 50 bps hike, Mr. Bostic will need extra security to get his morning Starbucks Latte.
For investors, it is important to keep an eye on the most important metric that determines stock prices – earnings, and not be swayed by the Fed, even though our belief remains that a bull market will not resume until the Fed throws its support behind it. The Fed’s relentless efforts to slow down the economy will inevitably hurt earnings and push stocks lower, in our view.
One historical fact that investors who are inclined to chase any-day-of-the-week rally would do well to remember – A bear market has never ended before the start of a recession.