Yesterday, as expected, the Fed raised their benchmark rate by 0.75%. This move takes the rate to around 3%. None of this was a surprise. However the market reacted poorly because the Fed raised their guidance for the rate at year-end to be around 4.4% from a current 3-3.25%. This implies two more large rate hikes at the November and December meeting. Right now the market is working to price in a 0.75% move followed by a 0.5% move.
The good news is that they only moved their year-end 2023 guidance to 4.6% which implies hardly any more raises in the target rate in 2023. This is of course just guidance, but if it holds true, we are nearing the end of the rapid tightening. By the end of 2024, they currently expect to lower rates as compared to 2023.
The news over the coming weeks is crucial as to whether we are seeing the light at the end of the tunnel. Specifically we will be watching the job openings data and the core inflation data that are coming. Both of those had lousy readings last time, so an improvement isn’t too high of a bar. For the stock market, this is a time where we want to see bad economic indicators. Ideally we will see available jobs drop by a number exceeding 500,000 since we are still at least 4 million away from a normal level.
Remember that markets are forward looking and should pretty much immediately price in all available information. If the data come in correctly over the next few weeks and months, the market could very well go up from here. What is driving the market downturn is almost exclusively the Fed tightening and that may slow down significantly in just a couple of meetings.
Another bright note is that interest rates are finally interesting again. As an example, a blended mix of high yield and corporate bonds going out less than 3.5 years is paying close to 6.5% now, with parts approaching 9%. These rates are something we haven’t seen in a long time, and are finally attractive and helpful to retirees looking to live off their portfolios.
As always, if you have any questions or concerns don’t hesitate to reach out to us.