US stocks surged yesterday and look set for fifth consecutive weeks of gains after the Fed slowed down its pace of interest rate hikes and announced a 25 basis point rate hike.
In the December meeting, the Fed raised rates by 50-basis points. Prior to that, the US central bank had raised rates by 75-basis at four consecutive meetings. After the most recent rate hike, which is the first for the year, the Fed funds rate stands at 4.50-4.75%, which is the highest since October 2007.
US stocks surge after Fed meeting
US stocks whipsawed yesterday. While they fell initially after the rate hike announcement, they eventually recovered and the Nasdaq Composite rose 2%. The tech-heavy index gained 11% in January and had the best opening to the year since 2001. Generally, stocks do well in the rest of the year after a strong January. 2001 was a notable exception here as US stocks plunged despite the January spike.
US stock futures are in the green today also after Meta Platforms’ revenues beat estimates. Markets had tepid expectations from the social media giant after Snap posted disappointing earnings and provide tepid guidance a day before.
Fed raised rates by 25 basis points
Coming back to the Fed meeting, the 25 basis point rate hike was in line with estimates. Markets were almost unanimous that the Fed would raise rates by 25 basis points. The press release stated, “Inflation has eased somewhat but remains elevated.” It added that the FOMC is “highly attentive to inflation risks.”
The FOMC reiterated its resolve to fight inflation and said, “The Committee is strongly committed to returning inflation to its 2 percent objective.” It added, “in determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
In the previous meeting, the Fed had used “pace of future increases” which it changed to “extent.” Markets saw it as a sign that the Fed is eventually looking to end the rate hikes.
US stocks rose after Powell’s press conference
In the past, Fed chair Jerome Powell has spooked markets with his hawkish comments at post-meeting press conferences. However, at yesterday’s press conference, he sounded less hawkish, if not outright dovish.
Powell acknowledged, “We can now say I think for the first time that the disinflationary process has started.” Notably, Cathie Wood of ARK Invest has, for now, months been saying that the US economy is headed for deflation. Tesla’s CEO Elon Musk also echoed her views. On multiple occasions, Musk has said that the Fed’s rate hikes would push the US economy into a deeper recession.
Tesla stock crashed in 2022 and lost 65% of its market value. The stock however rebounded in January and had its best month since May 2013.
Powell yet again dashed pivot hopes
Powell meanwhile added that it is “very premature to declare victory or to think we really got this.” In the past also he has cautioned against premature pivot. At the press conference Powell yet against dashed pivot hopes and said, “Given our outlook, I don’t see us cutting rates this year, if our outlook comes true.”
Meanwhile, Powell did say that it is “certainly possible” that the Fed funds rate stays below 5%. Overall, the Fed meeting kept the party going for US stocks which have rebounded in 2023 after a dismal 2022. The Nasdaq Composite fell 33% last year amid the sell-off in tech names.
Here it is worth noting that US inflation is still way above the 2% that the Fed targets even as the CPI has fallen for six straight months and fell to 6.5% in December. The metric peaked at 9.1% in June. Also, the CPI as well as WPI fell on a monthly basis in December.
The PCE (personal consumption expenditures) also rose at an annualized 5% in December and has come off its 2022 highs of 7%. The core PCE, which excludes the volatile food and energy prices rose at an annualized pace of 4.4%. It peaked at 5.2% in September.
Powell emphasized that “without price stability, the economy does not work for anyone.”
Recession fears rise even as US stocks rebound
While US stocks have recovered in 2023, recession fears have also increased. Banks like Wells Fargo, Bank of America, and JPMorgan see a mild recession as the base case scenario for this year.
Many analysts believe that the rally in US stocks will soon fizzle away. Morgan Stanley’s chief US equity strategist Mike Wilson is among those who expect US stocks to crash. He was right about his market calls in 2022 but so far, bulls have had the upper hand in 2023.
Bond guru Jeffery Gundlach said that while the probability of a US recession in 2023 has receded, it is still above 50%. He also said that the Fed would stop its rate hikes after one more hike. Gundlach meanwhile is circumspect on whether the Fed would start cutting rates this year.
