There’s a major event looming, but it’s not what everybody thinks. This time around, what’s important is not the size of the interest rate hike that the Federal Reserve is about to impose, but what Chairman Jerome Powell says afterwards.
In the February 1 FOMC meeting, the central bank is widely expected to raise the federal funds rate by 25 basis points, or 0.25%. That’s in contrast to the more aggressive 0.5% interest rate raise from December, and the four consecutive supersized 0.75% rate hikes prior to December.
The mini-hike is pretty much a foregone conclusion at this point. Oddsmakers almost universally agree on the 25-basis-point rate raise for the current FOMC meeting, to the point where anything bigger than that could induce a sharp correction in the stock market.
If there is a mini-hike as expected, don’t assume that there will be a massive relief rally in stocks. That already happened in advance, throughout the month of January. Therefore, don’t just tune out after the 2:00 p.m. EST FOMC announcement. More important, most likely, will be what Powell has to say when he briefs the media at 2:30 p.m. EST.
One thing is assured: The media will analyze every word Powell says. If he says something hawkish-sounding, it’s possible that stocks will plunge in the aftermath.
It’s possible, but not probable. That’s because everyone and his uncle already expects Powell to indicate that the central bank doesn’t have any near-term plans to pause interest rate hikes or pivot to rate cuts.
Or, as CNBC put it: “Market pros are expecting Fed Chair Jerome Powell to sound hawkish, meaning he will lean toward tighter policy and keeping interest rates high.” Stock market crashes don’t typically happen when there’s no element of surprise, so a fully expected hawkish Fed won’t likely rattle the market very much.
Besides, equities traders know full well that central bank policy and Fed talk can change on a dime. Remember how quickly Powell pivoted from interest rate hikes in late 2018, to rate cuts in 2019? And, remember how Powell shifted last year from “inflation is transitory” to “inflation isn’t transitory”?
When listening to the Fed chairman’s tough talk, assume that it could easily change in a month or two. Don’t assume, however, that January’s stock market rally can’t continue into February.
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You’ll be amazed, if you’re not accustomed to it, to see how quickly and easily the stock market climbs the wall of worry. To quote Rick Rieder, BlackRock’s chief investment officer for global fixed income, “I think if he’s hawkish, I think the markets have built that in. I think if he’s not, the market could make another leg.”
Also, consider the Federal Reserve’s actions more than its words. If the Fed only raises its benchmark interest rate by 25 basis points after four 75’s and a 50, this will speak much louder than anything Powell has to say about it.
Additionally, think about why Powell is hiking the fed funds rate. More than anything else, it’s to contain inflation. If that’s the goal, then it shouldn’t be too long before Powell can declare victory and tap the brakes on rate hikes.
Bear in mind that the Consumer Price Index topped out at 9.1% in June, and has already retraced to 6.5% in December. This certainly isn’t to suggest that products and services are cheap now. They’re still expensive, but the price increases won’t accelerate at last summer’s torrid rate.
Instead of obsessing over the Federal Reserve, consider paying more attention to corporate earnings. We’re in the middle of a high-stakes earnings season, in which companies and their investors are coming to terms with 2022’s challenging fourth quarter.
Read the earnings reports carefully, and look for quarterly 10-Q forms to get the full data set instead of only what the companies want to you see. There may be prime opportunities to buy shares of great companies if the prices decline more than is warranted.
Or, the entire stock market might go down if Powell commits another policy error. If so, I’ll be more than happy to dust off my shopping list and scoop up shares of high-conviction businesses at bargain prices, and will thank the Fed for a job poorly done.
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