Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
It has been a pretty wild ride in the market these last few weeks. The roller coaster culminated in a series of violent rallies and sell-offs this week. Zooming in a bit closer, we can see the strong sell-off in the middle of April followed by a series of high percentage jumps and crashes. On Wednesday, the market rallied following the meeting from the Fed to raise interest rates 50 bps. The next day, the market fell nearly 4% in one of the worst days for the market since 2020. The low established early this week, however, is yet to be violated.
All financial news this week revolved around the Federal Reserve meeting on Wednesday. The Fed elected to raise interest rates by 50 bps, begin reducing the size of it’s balance sheet by about $30b per month, and ruled out 75 bps increases later this year.
Remember, this whole mess was ultimately caused by an unexpected inflationary environment. The Fed’s primary mandate is to control inflation while growing the economy and it will do whatever it takes to control that inflation. Which includes slowing down the economy, lowering demand, and even increasing unemployment. The Fed can control all those via their Fed Funds rate.
Here is the trajectory of the Fed Funds rate as measured by the Treasury Yield Curve. The Fed intends on increasing short-term borrowing rates until inflation responds positively. But it is very likely that the Fed is capped on the height of that interest rate before the economy starts contracting. Odds are, that cap is probably somewhere around here but no one truly knows. If 2.5-3% on the Fed Funds rate is enough to control inflation then we can start to breath easy. Otherwise, increases above that area will likely increase borrowing costs for businesses, lower profitability, an increase unemployment ultimately resulting in a recession.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved May 6, 2022, from FactSet Database.
2.FactSet Research Systems. (n.d.). Total CPI (Y/Y %) (Interactive Charts). Retrieved May 6, 2022, from FactSet Database.
3.FactSet Research Systems. (n.d.). US Government Yield Curve (Markets). Retrieved May 6, 2022, from FactSet Database.
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