The lingering question remains: what defines a ‘sufficiently restrictive’ stance for the Federal Open Market Committee (FOMC) policy? The FOMC intends to maintain current levels, shaping market curves as long as necessary, historically extending past the point where a shift in direction would seem appropriate.
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Predicting the impact of evolving job levels on Fed policy is challenging; the Fed tends to set policies, hoping for satisfactory outcomes. Past experiences have shown unreliability in both directions, except during ’emergency’ situations, where sudden shifts, such as those in March 2020, immediately impact markets.
Chairman Powell emphasized a forward-looking approach, relying on data dependency. He noted improved labor supply-demand situations with slightly reduced wage pressures despite concerns to the contrary. Powell acknowledged the economy’s expansion above expectations, tempered by moderated inflation.
Despite inflation concerns, Powell believes expectations remain stable. Observers noted a subtle change in his demeanor, possibly reflecting increased worry.
Financial conditions have tightened, a fact Chairman Powell acknowledged, with ongoing Quantitative Tightening (QT) albeit at reduced levels. Acknowledging the lag effect of previous tightening, Powell hinted at historical policy delays.
Market Analysis:
The S&P continues to hover around the 200-day Moving Average, with fleeting unsustainable rallies. Despite the passing of the heaviest seasonal period, looming tax shifts and geopolitical impacts introduce volatility. The Fed maintains uncertainty, acknowledging the apparent financial tightening implications, notably in the housing market. The Bond market’s influence is evident, keeping the Fed biased toward rate hikes without explicitly stating it.
Risks are perceived as balanced, indicating a cautious optimism. The concept of a ‘softish’ landing, a gradual economic slowdown, is being considered. Concerns about artificially low-interest rates’ long-term effects on inflation are growing, highlighting the need for prudent fiscal and monetary policies.
In Summary:
Monetary policy remains restrictive, with limited optimism. The market displays disparities between overpriced large caps and suppressed small caps. Geopolitical factors, mainly containing oil price rises, are pivotal. Seasonal trends gradually favor stability, while the Fed’s stance provides a temporary respite from concerns. The market’s future trajectory hinges on global politics, making sense of cautious anticipation prevalent.
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