February’s Main Event – Fed Decision Day

February 2, 2023

It was not all that long ago that Federal Reserve meetings would barely be covered by the media. Now they are truly the monthly headline event and Wednesday’s announcement was no exception (February 1, 2023 meeting)

US Federal Reserve Chair Jay Powell took the stage and announced a widely anticipated 25 basis point rate increase, bringing the current range to 4.5-4.75%. This move was a step down from prior hikes that was 50bps. In a brief opening statement and the Q&A that followed, there was a noticeable difference in tone from prior meetings. If you had “disinflation” on your bingo card, you would have been a big winner as that word was used 13 times (compared to zero in the December meeting). The message was clear. – inflation remains elevated but it has eased.

It was evident Powell is pleased to see his actions have an impact on inflation, as he stated “it is gratifying to see the disinflationary process now getting under way.” However, he tried to strike a balance and signal that more work has to be done. He did not indicate a rate cut or even a pause as a possibility. He stayed on message that the Fed’s forecast remains for inflation to stay sticky and for further rate increases to be necessary. He cautioned against easing policy too soon (“risk of doing too little” is grater than doing too much) and noted they are focused on sustained changes – not just short term improvements in data.

However, throughout the press conference, markets seemed to have been reading between the lines and found a bullish case buried in the messaging, demeanor, and tone of the Fed Chair. This was evidenced by a dramatic move lower upon the announcement and then a fierce rally during the press conference and into the close (especially in higher growth/more interest rate sensitive areas of the market).

Who’s right – the Fed or markets? In my view, I believe they could both be proven right in coming months. Both are seeing marked declines in inflation. Both are sticking with the data and trying to make a reasonable prediction of the future. Both are indicating they will change course if data improves. Both are seeming to indicate that the US economy may be able to avoid worst-case scenarios (stagflation, recession, spiraling inflation, etc). Both are acting like the worst may be behind us.

Of course, as has always been and will always be the case, nothing is certain in markets and investing. There remains a broad range of possible outcomes. But as always, that is the price we all pay to compound wealth over time. Our investing journey is made up of thousands of days, strung together to ideally result in an aggregate return that supports our long-term goals. Every day is different and every day is unique. I for one am grateful that today was a good day for markets.

Onward we go,

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio

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