The Fed meeting that took place in the middle of June marked the first pause in the baseline interest rate since January of 2022. The Federal Open Market Committee (FOMC) reviews economic and financial conditions, holding eight regularly scheduled meetings per year. At these meetings, they determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth. In the most recent June meeting, the Committee voted to leave the current federal funds rate unchanged at a target range of 5.00%-5.25%. Leading up to the meeting, the Federal Reserve was hinting towards this decision, but they also left the door open for further rate hikes in the remainder of the year.
Factors leading into this decision were headlined by slowing economic growth and labor markets loosening. Furthermore, inflation continues to soften but still remains elevated. Inflation numbers need to continue to soften over the second part of the year to convince the Committee that inflation is under control. Some members are not convinced, and about half of the Committee predicts a few more rate hikes to really cool things down and fully reign in stubborn inflation.
In terms of the U.S. stock market, it continues to plug along for the year with one eye on the Federal Reserve and the other on establishing a bull market run. Just over a year ago, the S&P 500 slipped into a bear market, meaning the index slid more than 20% from the peak, which marked the end of the pandemic bull run. However, just about a year later the S&P 500 has crossed back over and is establishing a new run at a bull market. Once again, the patient investor has been rewarded with a big swing of the market in the positive direction in just about 12 months’ time.
You might sit back and wonder, what is supporting this new Bull market and can it last?
When I think of current market conditions and the last 12 months, one statement that I keep going back to is: High inflation really is transitory.
Inflation has been the stubborn child over the past couple of years that keeps kicking and screaming and it’s tough to see the end in sight. And that vision has made it tough to think of what the next 6-12 months might look like. But you cannot assume that the current conditions will persist long into the future. It’s important to understand that it takes a while for declines in upstream inflation to work their way into the prices of consumer goods and products, even into headline inflation data that is published in the consumer price index (CPI). Behind the scenes there is favorable pricing data that is showing softening, but they haven’t bled through to headline inflation. Attention will turn to August’s CPI, which is set to be released Sept. 13th. Analysts are saying there is a strong chance we still don’t see large softening of upstream inflation. “A recent study by Goldman Sachs says upstream costs take two to six quarters to influence headline price measures”. Therefore, we’re not out of the woods yet, but consumer confidence will have a chance to rebound as the economy continues to plug along.