As a result, we expect the Fed to remain aggressive in its fight against inflation. The committee will probably increase short-term interest rates by 0.75% when it meets on November 2. That would be the fourth consecutive 0.75% rate hike and would lift the fed funds rate to a target range of 3.75% - 4.0%.
The Federal Reserve has been able to hike interest rates this abruptly because of the still-strong job market. Specifically, September’s unemployment rate fell back to 3.5%, a 40-year low. (The Federal Reserve has a dual mandate of stable inflation and full employment.)
However, a few labor market cracks have appeared. Specifically, the number of job openings unexpectedly fell from 11.1 million to 10.1 million, indicating employers are hiring fewer people. Additionally, a recent survey showed that manufacturers had pulled back on hiring. Finally, the number of layoffs has started to move up.
Unfortunately, the Federal Reserve likely won’t pause its rate hikes until it sees consistent evidence that inflation is falling. Herein lies the risk. Monetary policy (i.e., rate hikes) works with about a 6-12 month lag, so, in that sense, the Fed actually doesn’t have a strong indication of the economic effects of the actions it’s already taken.
Putting it all together
A problem with veering off course is that it can be challenging to get back on track. The reason for that is emotions can take over. For example, it seems easy to bail out when things look scary, but when do you get back in? There is no all-clear signal the market can give you.
In fact, it’s quite the opposite, because when the economy and market appear to be at their worst, it’s often an excellent opportunity. (You can see this in the tables at the beginning of the article.)
We recognize that anxiety about the economy and the market is high and that it’s been a challenging year for all investors. However, we also acknowledge that markets move higher over time, and staying invested has benefited countless patient investors. Of course, navigating this terrain can be challenging, but understanding the numerous capital market interactions can help ensure your investments are prudently positioned for long-term success.
October 14, 2022
All data unless otherwise noted is from Bloomberg. Past performance does not guarantee future results. Any stock market transaction can result in either profit or loss. Additionally, the commentary should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the provided information. Market and economic conditions could change in the future, producing materially different returns. Investment strategies may be subject to various types of risk of loss including, but not limited to, market risk, credit risk, interest rate risk, inflation risk, currency risk and political risk.
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