Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- The Fed’s June meeting could be a market-moving event
- Growth forecasts decline as rate hike expectations rise
- Market’s view of Fed action may be too aggressive
All eyes are on the Fed! With the May inflation reading now in hand, investors are looking ahead to next week’s Federal Open Market Committee meeting (June 14-15) where Chairman Powell will provide the latest bird’s eye view of the US economy. Investors’ belief in the Fed’s aptitude for raising interest rates without causing a recession has been in flux, so next week’s meeting could potentially be a market moving event. This is especially true given the release of the Fed’s updated economic projections and dot plot in addition to the Chairman’s press conference. The financial markets may want an answer on whether the Fed can engineer a soft landing in the ‘blink of an eye,’ but unfortunately it will take some time to see how quickly interest rate hikes will impact the economy. In the meantime, we’re maintaining our faith in the Fed and sharing our insights of what may come from the June meeting.
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The Fed Will Always View The Economy With A Fresh Pair Of Eyes | While we expect the Fed to raise the fed funds rate 0.5% next week and again in July and September, our projected Fed policy path thereafter remains far more patient than what the market is expecting. Our reasoning? First, the action taken thus far has already impacted the more interest-rate sensitive areas of the economy such as housing. In fact, mortgage applications have declined 33% from the recent peak and buyer traffic has begun to lessen. Second, sentiment has weakened across the board. Consumer, CEO, and investor confidence are all at multi-year, if not record, lows. This is important because to prevent a self-fulfilling prophecy, the Fed will need to boost sentiment sooner rather than later. And third, some of the forces that are expected to drive inflation lower (e.g., rising inventories, discounting, transportation costs, wage pressures) are in place and should lead to a deceleration in pricing pressures. We also remain in the camp that some inflation with healthy job creation is preferred over stifling inflation at the expense of a recession and lay-offs.
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