Mid-Week Market Minute 11.02.22

Fed Again Raises Interest Rate; Key Jobs Report on Friday

U.S. stocks initially traded higher on Wednesday and then declined after the Federal Reserve approved a fourth consecutive 75 basis point (0.75%) interest rate increase in a move that markets had been expecting for weeks. At the conclusion of their November meeting, the Fed raised the short-term funds rate by 0.75 % to a target range of 3.75%-4%, the highest level since January 2008. Importantly, the Fed signaled a potential change in how it will approach monetary policy to bring down inflation, stating policy changes “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.” Additionally, the Fed again reiterated growth in spending and production is “modest” and stated “job gains have been robust in recent months” while inflation is “elevated.” The statement also emphasized the policymakers are “highly attentive to inflation risks.” The rate increase comes as recent inflation readings show prices remain near 40-year highs. Markets now evaluate comments from Federal Reserve Chair Jerome Powell and other Fed speakers for clarity on whether the Fed thinks it can implement less aggressive future rate hikes to achieve its inflation goals. As of mid-week, according to the CME Fedwatch tool, markets are about evenly divided between a 50 basis point (bp) and 75 bp increase at the final Fed meeting of this year, set for Dec. 13-14.

As fears of a recession linger, Powell has said he still sees a path to a “soft landing” in which there is not a severe contraction. Market participants will look to verify this through monitoring inflation and growth numbers in the weeks ahead. Last week, the Fed’s preferred inflation measure, the core PCE Price Index, showed the cost of living rose 5.1% in September on an annualized basis, beating the expectations of a 5.2% level. In terms of growth, GDP declined in both the first and second quarters by -1.6% and -0.6%, respectively, before rebounding to 2.6% in the third quarter. Key data this week will come from the employment report on Friday, where the expectation is for nonfarm payrolls to increase by 210,000 for October, down from 263,000 the previous month. Any significant deviation from this 210,000 likely will cause market volatility, as the Federal Reserve is keeping a close watch on the strength of the labor markets in addition to the inflation and growth indicators.

Source: GSAM, CNBC, JPMorgan

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