In a widely anticipated move by the Federal Open Market Committee (FOMC) yesterday the Fed funds rate was once again increased by 75 basis points. Regions Bank’s Chief Economist Richard Moody, Chief Investment Officer Alan McKnight and Chief Market Strategist Brandon Thurber reflect on this latest move.
“I remain in the camp that the Fed will maintain their resolve and raise rates again at the final two meetings of the year, and then not pivot to a reduction in rates for an indefinite period,” McKnight said following the news. “Otherwise, the FOMC runs the risk of looking like ‘all hat and no cattle’ to the markets.”
Unlike the July rate increase, the markets reacted less favorably on Wednesday afternoon as the Federal Reserve signals there is still room for more increases in the ongoing battle against rising inflation. Originally up 300 points, the Dow swung dramatically to the negative, seeing a pullback of more 500 points at market close.
“I think the market is reacting to the very clear resolve that the chairman expressed during the press conference about getting inflation down even if it means a more material slowdown in the economy and on the unemployment front,” McKnight said. “The market had been hopeful that the FOMC would be a bit more restrained in their language even if they got to the same level on rates this year.”
Additionally, McKnight believes operating margins will continue to come under pressure as the recent Consumer Price Index (CPI) and Producer Price Index (PPI) releases reinforce that costs will remain high and companies will struggle to completely pass along these higher costs to customers.
“As operating margins decline, valuations for stocks will come under pressure, which will cause continued volatility and lower expected returns,” said McKnight. “I envision a scenario where both earnings estimates and the multiple paid for those earnings come down in lockstep.”
Thurber noted that investors now have little choice but to expect the Fed funds rate to rise to a restrictive level and for the Fed to maintain that level for longer than previously expected.
“This realization pushed short-term Treasury yields higher and generated substantial weakness in risk assets after the Committee’s September meeting,” Thurber said. “This dynamic may weigh on risk appetite over coming quarters until the Fed hints at a pause in rate hikes.”
Following yesterday’s meeting, Moody shared his thoughts in his latest economic commentary piece: September FOMC Meeting: FOMC Signals Its Resolve To Stay The Course.
“In his post-meeting press conference, Chairman Powell stressed that the FOMC is ‘strongly resolved’ to bring inflation back down to 2.0 percent and will ‘keep at it’ until that goal is attained,” Moody noted in the report.
Moody also highlighted Chairman Powell’s comments that there is “no painless way” to get inflation down, and again stressed that the costs of prematurely loosening policy would be worse than the costs of the FOMC remaining on its present path.
“Not exactly inspiring, and more than a bit late, but at this point the right message to send,” Moody concluded.
For more on the potential market impacts of this week’s FOMC meeting and rate increase, join Moody, McKnight, and Thurber tomorrow for the Regions Weekly Markets Update Call at 11 a.m. Central.
To catch up on previous week’s calls, visit Regions Weekly Market Update recordings. These events are hosted by Regions Wealth Management team. Additional economic commentary and resources may be found on Regions.com.
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