Pressing pause, but a pause isn't necessarily permanent

DEWITT, Mich. - June 20, 2023 - PRLog -- Key Takeaways:

• The Fed kept rates unchanged last week, a move we think was appropriate, as inflation is on a downward path and the economy is showing signs of softening.
• We don't think this confirms the end of rate hikes, but instead offers an opportunity for the Fed to evaluate inflation and economic conditions before making further moves. We expect the Fed to continue to talk tough on its commitment to bringing inflation back toward its target, in an effort to ensure financial conditions don't loosen dramatically and reignite inflation pressures.
• The stock market rally has shifted into another gear recently, aided by the outlook for a less-aggressive Fed. We don't think the market has to give back all of the recent gains, but we do believe investors should expect some hiccups as we progress, spurred by shifting expectations for Fed moves and incoming economic and earnings data. We think these are conditions long-term investors can lean in to, buying dips and proactively rebalancing.

Sometimes doing nothing is actually quite something. Last week, the Fed did nothing with interest rates for the first time in more than a year, holding its policy rate steady after 10 straight hikes that totaled 5%. The question now becomes, is nothing from the Fed something for the market? Here's what you need to know about the Fed's pause and how it may play out:

A pause was prudent.

• The Fed kept rates unchanged last week, moving to the sidelines after a 14-month tightening campaign that lifted the fed funds rate by the largest amount (500 basis points, or 5%) in more than four decades².
• While anticipated, this decision was hardly a no-brainer, as the reason for the rate hikes to begin with – high inflation – has not yet been eradicated. That said, sufficient progress has been made on this front to warrant the Fed's pivot.

But a pause isn't necessarily permanent.

• The pause button is not the same as the stop button. The Fed went to great lengths to emphasize that while it intends to use this break to assess the impacts on inflation and the economy, it plans to hike rates further in coming months. The latest projections from Fed officials show an expectation for two additional quarter-point hikes (0.50% in total) this year¹.

Sources: 1. FactSet 2. FactSet, Edward Jones