The Week in Review: December 19, 2022
Not Even a Pivot with a Small ‘P’
After four-straight 75-basis-point (bp, 1 bp = 0.01%) rate increases, the Federal Reserve downshifted and boosted its key rate, the fed funds rate, by 50 bp last week to 4.25 – 4.50%. But it didn't muddy its hard-hitting anti-inflation rhetoric.
Since 75 bp rate hikes are probably behind us, Fed Chief Powell took great pains to distance the Fed from the idea that it might be considering a policy shift.
Powell said rates are still not high enough. “We'll need to stay there (at a yet-to-be-determined peak) until we're really confident that inflation is coming down in a sustained way. And we think that will be some time.”
That wasn’t pivot language. It wasn’t pivot lite. It wasn’t even a pivot with a small ‘p.’
The continued tough stance came despite the second-straight monthly inflation reading that came in less than expected.
A day before the Fed’s decision, the Consumer Price Index rose 0.1% in November, the U.S. Bureau of Labor Statistics reported. Excluding food and energy, the core CPI rose 0.2%.
It’s welcome, and it’s encouraging, but two months isn’t exactly a convincing trend, in the Fed’s eyes.
Moreover, the Fed lifted its end-of-2023 fed funds projection from 4.50 – 4.75% to 5.00 – 5.25%. It’s another upward drift that caught the attention of investors.
Take the projected level next year with a couple of grains of salt. At this time last year, the Fed expected a fed funds rate of 0.75 – 1.00% by the end of 2022. That’s quite a miss.
Nonetheless, the heavy lifting is probably behind us. Still, the Fed made sure it balanced a smaller rate hike with a stern message, lest short-term traders get too complacent, and the public loses faith in the Fed’s commitment to price stability.
Short-term traders, who have made a series of bets this year that the Fed would pivot, were once again disappointed.
If you have any questions or concerns, please do not hesitate to contact me directly.
Two for the Road
Since 1961, in inflation-adjusted terms, the S&P 500 has delivered an almost 3,000% return between the months of November and April. In stark contrast, the S&P has only delivered a cumulative return of 14% from May through October in those same years. Stated differently, the returns from November through April were 214 times greater than from May to October for the past 61 years. - Barron’s, October 25, 2022
In October, the U.S. savings rate fell to 2.3%. It’s the second-lowest savings rate on record going back to 1959. - MarketWatch, December 1, 2022
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