The Fed’s strategy of gargantuan interest rate hikes bears much of the blame for triggering a bear market in stocks in 2022, but investors might be surprised to see how stocks fared in the days this year in that policymakers have crashed into the metaphorical brakes of monetary policy.
The S&P 500SPX,
has fallen about 10% overall since Fed Chairman Jerome Powell and his colleagues began the rate-hike cycle in mid-March, or three meetings ago, analysts at Bespoke Investment Group noted, in a statement. note.
But the index, they noted, has risen at least 1.5% on each of the three Fed meeting days during this period.
The benchmark large-cap index gained 2.2% on March 16 after Powell’s first rate hike of 25 basis points, or a quarter of a percentage point. On May 4, the S&P rose 3% after Powell’s second 50 basis point hike, which was the biggest such hike since 2002. And at the last meeting on June 15, the S&P 500 gained 1 .4% the day after a 75 basis point rate hike, the largest move since 1994 (see chart below).
“You can see there was an initial drop right after the 2pm ET rate decision all three times, but then stocks rallied strongly for the rest of the day once Powell’s press conference started” , the analysts wrote.
Fed funds futures traders have priced in a 75% chance of another 75 basis point rally on Wednesday, with about a 25% chance of a large 100 basis point move. The Fed will announce the outcome of the two-day policy meeting at 2 p.m., and Powell’s press conference is scheduled to start at 2:30 p.m.
A 75 basis point move looks like a done deal, according to Deutsche Bank macro strategist Alan Ruskin.
“Instead, the market reaction will be focused on the messages, and here it becomes much more complicated, because both inflation and growth will take some dual tactics, which may even sound contradictory, but reflect the macro complexities of the day. ”, he said in a note on Tuesday.
In fact, investors are ready to hear what Powell has to say about growing fears that the economy is slipping into a recession or has already slipped into one. Some market watchers are howling at Powell to reject market-based expectations that the Fed could start cutting interest rates again next year and that the fed funds rate is likely to top about 3 percent beforehand. ,5%.
Powell will try to avoid contradicting Biden administration statements denies that the economy is in recession and keep in mind that they’re often hard to recognize in real time, Ruskin said, noting that the slowdown seen so far doesn’t look like a typical recession given how strong the job market has been so far.
Ruskin expects that much of the reaction to the Fed’s decision will be directly driven by the signaling of the September meeting.
While investors will focus on the question of a 50 versus 75 basis point rate hike, the market has priced in a 136 basis point cumulative adjustment for July and September, Ruskin said, “which seems reasonable and doesn’t it is”. something that the Fed will do everything possible to fine-tune.”
The desire not to be explicit and change rates in the short term means the July meeting will not feature a “one-liner from Powell that sets the tone for all markets,” Ruskin said. “What Powell will be able to say is that the Fed is still focusing on a benchmark rate that is moderately tight relative to its neutral rate, and the higher the level of rates, the more incremental rate changes can be. less than 75 bp”.
The dual message on rates will likely be that the Fed has an open mind.
on a 50 or 75 basis point move in September and that it’s too early to make that call, Ruskin said, while there may be some reversal in market expectations of a near 3.4% top rate.
Stocks were headed higher ahead of the Fed’s decision on Wednesday, with the S&P 500 rising 1.2%, while the Dow Jones Industrial Average DJIA,
rose about 125 points, or 0.4%, and the Nasdaq Composite COMP,
jumped 2.2% as tech heavyweights Microsoft Corp. MSFT,
and Alphabet Inc. GOOG,
recovered after earnings.