However, with markets having priced in a mild downturn already, we believe the upside versus downside in markets is certainly more compelling today. We see this potential recovery as more "U-shaped versus the speedier "V-shaped" market rebounds we have seen in recent history. This process may take time, perhaps through the second half of the year, and we may continue to see market volatility in the interim. If inflation does moderate, this could allow the Fed to move at a more gradual pace of tightening, which will support market sentiment broadly. While headline inflation (driven by food and energy prices) is more volatile – and less impacted by rate hikes – we believe the Fed's aggressive policy decisions will support a gradual move lower in core inflation and bring down consumer demand over time. In our view, this could happen by year-end, driven in part by a cooling housing market and potentially softer labor market. We don't, however, see markets mounting a sustainable rally until we see evidence of moderating inflation – perhaps two to three consistently lower readings. Overall, we believe that with the S&P 500 down close to 20%, markets are already discounting a fair amount of pessimism around the economy. Notably, the projections also indicate that inflation will be elevated this year, but come down to 2.6% next year.Ī sustainable market rally will depend on the path of inflation The new Fed projections indicate that the economy will slow, and unemployment will climb gradually, but no recession on the horizon. The Fed's updated June projections FOMC - June Projections A downward trend in inflation would allow the Fed to raise rates at a more gradual pace.įigure 1. However, it expects inflation to moderate to 2.6% next year and head to 2.2% in 2024.
Inflation will peak this year before moderating over the next two years: The Fed increased its inflation forecast for this year, bringing headline PCE inflation to 5.2%.While the forecast calls for slowing economic growth, these are not consistent with recessionary conditions and Economic growth will slow to sub-2.0%, but a recession is not in the forecast: The Fed expects the labor market to cool, with the unemployment rate climbing to 3.9% next year, and GDP growth slowing to around 1.7%.A couple of key takeaways from the Fed's June projections include The Fed also released today a new set of economic projections, which, as expected, lowered growth forecasts and raised inflation forecasts for 2022, although inflation for 2023 is still expected to be lower. The Fed's updated projections do not indicate a pending recession, but a slowdown is likely While this would tighten economic conditions and increase borrowing costs for consumers and corporations, we should also see an impact on core inflation, which we would expect to moderate by year-end. Overall, the FOMC projects the fed funds rate to head toward 3.4% in 2022, which would bring rates more in line with current market expectations and push the fed funds rate to restrictive territory. Chair Powell did note that while these outsized Fed rate hikes should not be common, he would expect next month's meeting to also bring a 0.50% or 0.75% rate hike, depending on incoming data. The S&P 500 headed higher by over 1.0% on the back of this move, while the tech-heavy Nasdaq was higher by over 2.0%. The markets welcomed this rate hike as a signal of credibility in the Fed's inflation-fighting mandate and a step in the right direction toward bringing interest rates back to more neutral territory. Of note, Fed Chair Jerome Powell highlighted in his comments that the FOMC's primary focus currently is on bringing down inflation in a "clear and convincing" manner over the next few months.
The Fed raises rates by 0.75% and improves its inflation-fighting credibilityĪs expected, the Federal Reserve today raised rates by 0.75%, its largest increase in 28 years, bringing the federal funds rate to around 1.50%.
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