The markets were riveted on one man on Wednesday as 2.30pm EDT rolled around. Chairman of the Fenderal Reserve, Jerome Powell was to provide a state of the market or more to the point "a state of inflation" update. A 0.5% increase in interest rates was already baked in. The unknown was whether the tone of the Federal Reserve Chairman was going to be increasingly hawkish or more in line with market expectations.
As we have said in previous blog articles, the goal of the Federal Reserve is to curb spending and bring inflation back down into its 2% per annum goal. The Federal Reserve is well aware that acting too hawkishly could send the economy into a recession and not acting agggresively enough could let inflation run amock. They are are having to walk an intricate balancing act to send the message that they will take aggressive action while at the same time keep an eye on the health of the economy.
In summary, Powell communicated exactly that on wednesday and that their primary intent is to dampen demand to bring inflation down while at the same time allowing the economy enough bandwidth to keep growing. At this juncture, the Fed projects a target of 2.4 percent by year's end. The markets responded by continuing to sell-off as they try to digest the impact of rising rates on the economy. A more pessimistic outlook will need to be swayed by market forces that point to "more light" at the end of the tunnel.
It is important to maintain perspective which is rare for markets to do in the short term. Rates of 2.4 percent are historically low. The markets have become accustomed to cheap money in abundant supply which favors a risk-on investment climate. That is changing and while the Federal Reserve projects 2.4% by year-end, this can change depending on inflation numbers. Curbing inflation and consumer demand may prove more challenging and necessitate more aggressive rate hikes. These are the "unknowns" which alongside continuing supply chain issues, shortages in labor, wage-push inflation and other factors are creating a risk-off climate.
We are in the midst of a significant re-calibration of federal reserve policy and the markets are still adjusting to what the impact of this will be. Rising rates - when looked at in a historic context - are not a shoe-in for a recession or bear market. as examined in a prior blog post
In addition, not all sectors in the economy are affected equally. Energy for example may - in the current geo-political - backdrop see continued strength. Travel and Leisure may also perform well this summer as news of booked out flights and hotels reaches the media.
In the midst of current market uncertainties, some companies continue to out-perform while their share prices fall. When looked at more objectively and over a longer term horizon, such companies and their sectors can present buying opportunities.
Investing requires time, patience and expertise. Investors that have all three of these core competencies have been consistently rewarded by the markets in a historic context that spans over 75 years.
A quality investment advisor or wealth management firm not only provides these competencies but also value added "peace of mind" and an expert sounding post to navigate the inevitable turbulence that markets reflect and the fear and greed that can accompany them.