Federal Reserve Chairman Jerome Powell is largely expected to raise the fed funds rate this afternoon, but the increasingly important question is the outlook for future Fed meetings. While backing off from hawkish rhetoric can be costly in the inflation battle, investors would most certainly cheer commentary in support of a \u201cone and done\u201d position today. In past meetings though, when Powell has tilted dovish, financial conditions loosened further, causing inflation to bounce back, signaling the need for additional tightening. Market players, furthermore, won\u2019t be smiling at the end of the day if Powell keeps a September hike on the table. Stocks and yields are down at the moment as spectators impatiently await Powell.<\/p>\n\n\n\n
The impacts of tighter monetary policy typically hit interest rate sensitive sectors initially, such as automobile purchases, real estate, factory equipment and other big-ticket items that are typically purchased with financing, before spreading to the non-rate sensitive sectors. The current inflationary cycle, however, is different, with huge amounts of pandemic monetary and fiscal stimulus shoring up corporate and consumer balance sheets. Corporations have continued hiring after experiencing labor shortages in an effort to maintain proper staffing levels at the expense of margins. Consumers have enjoyed lofty gains to their investment portfolios and real estate relative to pre-pandemic levels while also having a plethora of job opportunities to choose from alongside strong wage gains, propelling household spending despite a drastic reversal in interest rates.<\/p>\n\n\n\n
As the Fed meets today, it will look at data from last week that sent mixed messages regarding the potential for the Fed to remain hawkish without sending the economy into recession. Encouragingly, labor market strength has persisted, implying that additional rate hikes may not wreak havoc on employment. In the past few weeks, unemployment claims and job openings have been supportive of jobs growing in excess of 200,000 per month. Residential real estate is also encouraging. Just yesterday, the S&P CoreLogic Case-Shiller home price index recorded its fourth-consecutive month of price gains on a national basis, defying the headwinds of high interest rates and low affordability. New home sales reported today are still moving at a strong clip and representing an increasing share of real estate transactions. The services sector is losing momentum, however, with July\u2019s services PMI and Redbook Retail Sales falling to their lowest levels in months. Manufacturing remains in the tombs, as the strong Chinese recovery has yet to manifest amidst depressed consumer demand due in part to previous pandemic demand surges and slowing business investment.<\/p>\n\n\n\n
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