The Fed’s Clarity Boosts Stocks—For How Long?

The Federal Reserve Board raised the Federal Funds Rate by 50 basis points (0.50 percentage points) on Wednesday as it ramps up efforts to contain the highest inflation in 40 years.

The largest rate increase since 2000 was an expected–yet significant–shift in the Fed’s approach to fighting inflation, which to date has included one 25 basis point increase. Fed Chair Powell stated after the decision that the Fed is now  “moving expeditiously to bring (inflation) back down.”

Mainly, investors cheered news of what the Fed isn’t about to do anytime soon. While Powell noted that the Fed may continue raising rates by 50 basis points at future meetings, he emphasized that a larger increase of 75 basis points is “not something the committee is actively considering.”

That pronouncement pushed the odds of a 75 basis point increase at the Fed’s next meeting in June down to just 11%, as seen in the chart above, from a high of more than 50% last month. Greater clarity about the likely direction of short-term rates sent the S&P 500 soaring, with the index closing up 3% on the day.

Any further market rallies may be short lived, however. It’s clear that the Fed wants to see financial conditions tighten going forward in order to crimp demand—but higher equity prices are incompatible with that goal. Unless supply chains improve significantly or workers flood back into the labor force—helping to alleviate supply-side inflation pressures—the Fed’s messaging may become more hawkish, causing equity market strength to fade.

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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