11/01/2022
INTEREST RATE FORECAST AFTER MID-TERMS
The key is how aggressive the Fed will be after the midterm elections are behind us. The November Fed meeting and projected increase in rates will be a key for action over the next 12 months. How aggressive will the Fed be in their efforts to cool inflation by raising interest rates.
“Today, it is inflation, the Fed’s response to elevated inflation, and resulting risk of recession, that will be what determines the market’s direction over the coming quarters,” Seema Shah, chief global strategist at Principal Asset Management, wrote in a recent research note.
INFLATION
On election eve, the state of the US economy is a blurry one. Job openings hit 10.7M despite Fed attempts to cool economy
The Fed has been hiking interest rates in a bid to slow the economy enough to crush inflation, but with every rate hike Wall Street grows more jittery that the central bank will go too far.
The Fed has already raised its benchmark interest rate five times this year, with the last three increases by three-quarters of a percentage point, and inflation is still accelerating. Wall Street expects another raise of three-quarters of a percentage point in November.
The last time the Fed raised interest rates so aggressively to bring down inflation was in the early 1980s, when inflation had soared to nearly 15%. That led to a cycle of alternating rate increases and cuts and volatility in the stock market. During one of the longest rate-hike cycles, which began in September 1980 and ran through May 1981, the S&P 500 gained 8.3%, although the gains evaporated by late September.
Uncertainty over how far the Fed will go in its rate-hiking campaign, how effective it will be to cool inflation and how much the economy slows will not be resolved by the outcome of next month’s elections. Until there’s more clarity on these questions, the market is likely to see more volatility in the months ahead.
“So, instead of the market being up by June or September of 2023, it’s down because the rate hikes are starting to bite and a recession ensues,” said Tom Martin, senior portfolio manager with Globalt Investments. “There are so many other things going on that this is just not something that I think you want to put a lot of stock in.”
