The Fed Delivers An Enormous Surprise To The Stock Market – Seeking Alpha
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Well, the Fed handed the market a big surprise on Wednesday afternoon by increasing their 2023 terminal rate forecast by 50 bps to 5.1% for all of 2023. On top of that, they raised their unemployment and inflation forecast while lowering their GDP growth forecast. The message is as clear as can be, not only will they not be cutting rates in 2023, but they are willing to accept an even bigger economic slowdown and higher unemployment rate than projected in September.
Additionally, the Fed still needs financial conditions to tighten further. Based on the current level of those conditions, there is still much work to be done. Financial conditions had eased considerably since the middle of October following that September CPI report and are currently at levels seen in August before the Fed hiked rates by 200 bps.
Bloomberg
Financial Conditions Need To Tighten
At this point, financial conditions aren’t even close to restrictive; they still need to get back to the zero bound, a level they have backed off from. When the Chicago Fed National Financial Conditions index is below 0, it suggests that conditions are accommodative to the economy, and when they are above zero, they are restrictive.
Powell made it clear in the press conference, on the first question, noting the Fed’s feeling today is that they are not at a restrictive policy stance. The Fed transmits its monetary policy by the easing and tightening financial conditions.
Bloomberg
In translation, the Fed will raise rates until financial conditions tighten enough to slow the economy and the labor market. The longer the markets fight against the Fed and conditions do not tighten, the more the Fed is likely to continue its hawkish rhetoric and probably the rate hikes.
Tightening financial conditions occur when rates increase, the dollar strengthens, spreads widen, implied volatility rises, and stock prices fall. Saying they want financial conditions to tighten and that they aren’t restrictive enough signals that asset prices need to drop.
Bloomberg
The Market Misread The Fed
More importantly, from a market standpoint, the market read the Fed completely wrong. Thinking that slower rate hikes meant the Fed was closer to being finished. The Fed …….