Analysis. After another massive Fed hike, some investors are seeing glimmers of hope

The Federal Reserve raised interest rates by 75 basis points for the second time in a row on Wednesday, but Chairman Jerome Powell hinted that the central bank may slow the pace of rate hikes in the coming months if there is evidence that tighter monetary policy is helping to contain the worst U.S. inflation in four decades.

Many investors believe that inflation will prove stubborn and force the Fed to maintain an aggressive stance for most of next year.

Others, however, hope Wednesday’s comments could signal an end to the market-wracking tightening of monetary policy is finally in sight, with some parts of the economy apparently slowing after the Fed raised rates by a total of 225 basis points.

“The comments from the Fed are incrementally confirming that we are taking on some risk,” said Pete Duffy, chief investment officer at Penn Capital.

Federal funds futures, which reflect investors’ expectations for key central bank rates, turned more pessimistic shortly after Powell’s comments. The odds of a Fed hike of 50 basis points in September – instead of a third hike of 75 basis points – rose to 65% from just under 51% on Tuesday.

Stocks continued their rally, helped by huge gains in technology and emerging stocks that pushed the Nasdaq up 4.1% on Wednesday, its biggest daily percentage gain since April 2020. The benchmark S&P 500 is up nearly 10% from its mid-June lows after falling 23.6% in the first half.

Colin Graham, head of asset management strategies at Robeco, which oversees $228 billion in assets, said Wednesday’s meeting reinforced his positive outlook and confidence that policymakers will manage inflation.

That view was echoed by Blackrock’s Rick Reeder, who said in a statement that “given what we’ve heard today, it appears that a slowdown in the pace of policy tightening would be possible.” He expects an increase of 50 bps. at the Fed’s September meeting and perhaps another 25bp rate hike or two. after that.

“I think the Fed has caught up a little bit,” said Van Hesser, chief strategist at KBRA. “They convinced the markets that they understood the seriousness of the situation and acted accordingly.”

Of course, many investors are wary of news of a surge in Fed aggressiveness after a year in which inflation has repeatedly surprised markets and forced policymakers to tighten monetary policy.

“We view Chairman Powell’s press conference as much more hawkish than the market’s interpretation,” Citi analysts wrote, adding that they see core inflation pushing the Fed to hike more aggressively than markets expect, with a 75 basis point hike in September.

Doug Fincher, a portfolio manager at Ionic Capital Management, believes inflation is far from abating and the economy could enter a period of stagflation — the toxic combination of high inflation and slowing growth — if the Fed deviates from its hawkish trajectory.

“Our concern is that inflation will still be with us … and if inflation is rampant, you need to raise rates,” said Fincher, who plans to add inflation-protected securities, or TIPS, to his portfolio.

The Fed’s latest hike pushed the key overnight interest rate to a range of 2.25% to 2.50%, which Fed officials said is a level that has a neutral economic impact.

With the Federal Reserve offering no clear guidance on what to expect, economic data will continue to be a key catalyst for market movements in the eight weeks leading up to the Fed’s next meeting, investors said.

Penn Capital’s Duffy thinks this is probably a healthy development.

“Markets are relieved because if we get soft economic data, the Fed will probably tone down a bit,” he said.

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