What Happened: Fed Keeps Rates Steady, But Eases Quantitative Tightening

 

What Does it Mean? 

With no surprise, the Fed announced no changes to interest rates in their report and press conference Wednesday.  Since the Federal Reserve last met in March, the economic data has shown inflation may be entrenched and interest rates will likely remain “higher for longer”. However, Jerome Powell announced that there were unlikely to be any additional rate hikes, and as a surprise, the Fed will begin slowing down their quantitative tightening.

 

Why Do We Care?  

Over the last month, the market has seen a pullback due to lingering high inflation and the expectation that the Fed is not lowering rates anytime soon. The initial reaction to the press conference was negative on Wednesday with the Fed essentially confirming that they were going to watch the data and make sure inflation was coming down before lowering rates. However, we believe investors dove into the comments and noticed a shift in character with the Federal Reserve now reducing the amount of quantitative tightening (QT) they are doing on a monthly basis.

 

QT is the process in which the Fed pulls money out of the economy by selling long dated treasury bonds that the Fed holds on their balance sheet or allowing those bonds to mature and be removed from their balance sheet. Not to be confused with quantitative easing (QE) where the Fed purchases bonds to stimulate the economy. See the article HERE for more info on QT and QE. This QT process allowed up to $95B of balance sheet runoff each month, but the Fed capped it at $25B moving forward.

 

Although this may seem like a subtle shift in policy, we think it shows that the Fed is not as hawkish (monetary tightening) as the market may have originally believed. In our opinion, this is the first real easing measure the Fed has done since rate hikes began in 2022. We will watch closely how it plays out, but we believe this could be the first step in the Fed shifting to a dovish (monetary easing) tone which would be very positive for the markets, especially the interest rate sensitive areas.

 

 

What Happened: U.S. job growth totaled 175,000 in April, much less than expected

 

What Does it Mean?

175,000 new jobs were added in April. This was much lower than the 240,000 expectation, and the always important hourly earnings growth of 0.2% also was lower than expectations.

 

Why Do We Care?

The economic data over the last month or so has been a string of hotter than expected inflation data, lower than expected GDP growth, and higher than anticipated job growth. Needless to say, we think this lower-than-expected April jobs report comes as a relief to the market. In our opinion, we live in a bizarre world that celebrates less job increases, higher unemployment, and less earnings growth, but it is a crucial component in the Federal Reserve’s decision-making process regarding interest rates. Remember, the Fed has a dual mandate – price stability and maximum employment. We have already talked on previous newsletters and videos about our suspicions that the jobs market was not as strong as the data has shown. If that continues to show in these reports moving forward, we believe the Fed will likely have to shift gears from fighting inflation to supporting the economy and labor market by lowering interest rates.

The S&P500 fell just under 5% in April. After this news along with some of the positive earnings reports we have seen it looks like the market rally that we saw in Q1 may be back on. I know we continue to harp on it, but it is so important to understand that with a healthy market comes healthy pullbacks. In our opinion, this year is almost certain to bring forth unsettling headlines and sustained volatility. Nonetheless, it remains crucial to maintain course and stay resolute in navigating this choppy environment.

 

Have a great weekend.

~ Logan

 

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