Federal Reserve Update

The Fed met in late March and decided to keep interest rates unchanged at 5.25%. This was expected and the market read the statement to mean that the Fed is no longer biased towards hiking interest rates. Subsequent to the announcement future interest rate cuts were priced into the fed funds market. This reinforced the notion that the Fed would keep the U.S. economy out of recession. The notion of an easier Fed policy diminished, though, when the full minutes from the recent meeting were released. The minutes revealed that the Fed Governors still believe inflation risk remains and could even require additional rate increases.

The strong employment report in early April seems to confirm the Fed’s inflation wariness and subsequent to the release of the minutes the likelihood of a Fed rate cut occurring declined significantly in the future’s markets. Currently, economists are debating as to whether the economy is in a mid-cycle slowdown or on its way to recession. The current market volatility is caused by this uncertainty. Stocks typically do well during mid-cycle slowdowns (which we are at the very least experiencing now), as a refreshing pullback in demand relaxes inflation pressures and allows for lower interest rates. However, history shows us that stocks don't fare so well if the economy doesn’t just slow down, but actually contracts.